Robert Solow on rents and decoupling of productivity and wages

Wonderful overview by Branko Milanovic of the recent lecture by Robert Solow at the Graduate Center.

“…Bob Solow explored a couple of days ago another possibility. Going back to his own seminal work on the theory of growth, some 60 years ago, Solow asked the following question: why did we assume that there is perfect competition and that factors are paid their perfect competition marginal products? We knew, continued Solow, that there were monopolies; moreover, the theory of imperfect competition (Edward Chamberlin and Joan Robinson) existed since the 1930s. Solow said: “I could not find a good reason, but since theory and facts were broadly in accord, nobody bothered much with the assumptions”. That is, until recently. How can we explain, continued Solow, a sustained and significant divergence between non-farm sector productivity and real wage? Despite some quibbles about the measurement of the two, there is no doubt that  they have diverged. But that goes against everything we thought we knew! (I am paraphrasing Solow here.)…”

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