The Paradox of Progress – Why Technological Advances Aren’t Boosting Wages 

Introduction 

Technological advances have always been the main driver of economic growth and prosperity; major historical events such as the Industrial Revolution (1760-1830), and –more recently – the rise of the internet have brought around higher productivity, and with that, higher wages. However, although events past the 1980’s (such as the rise of artificial intelligence and digital platforms) have made firms even more efficient, global wages have surprisingly remained level or have fallen. 

According to the Economic Policy Institute (2023), labour productivity has grown by 61.8% but hourly wages (adjusted for inflation) have only risen by 17.5% since the 1980s. This paradox raises some important economic questions: why is an increase in productivity not leading to a rise in real wages?  Who is truly gaining from these technological advances? Many economists have debated whether globalisation, declining union power, or the increasing dominance of capital over labour is to blame. Others claim that we are amid a structural shift in the economy, which requires completely new policies – such as a universal basic income (UBI) or taxes on automation. 

This article will explore the reasons behind the widening gap between technological advances and wage growth, and examine potential solutions to this problem. 

The Promise of Technology 

For centuries, breakthroughs in technology have reshaped economies in ways that seemed almost magical; take the Industrial Revolution for example, it sparked a slow but undeniable rise in wages, decade after decade. Fast-forward to the postwar era—highways, televisions, jet travel—and the same thing is occurring. Between 1948 and 1973, the average American worker became nearly twice as productive. And their paychecks? Those grew almost as fast, keeping pace at 91.3% (Economic Policy Institute, 2023). It wasn’t just numbers on a spreadsheet, however: families could readily afford previous luxury goods such as cars and college tuition—economists still glamorise this era as capitalism’s “Golden Age” (Gordon, 2016).   

If a worker can suddenly produce 10 footballs an hour instead of 5, companies should share those gains, right? Robert Solow – American economist and Nobel Laureate – certainly thought so when he created the Solow-Swan growth model (shown above) in 1950. Although the Solow-Swan model can also be used to highlight the diminishing return on capital as well as technological progress, it is the convergence hypothesis that is most important in this application. The output curve (represented by the red line) correlates to the production function, which shows how the amount of capital that a country has access to affects output; the savings and investment curve (represented by the green line) shows how much of the output is reinvested in capital accumulation; finally, the depreciation curve (represented by the yellow line) represents capital depreciation over time. The graph indicates that poor countries (with low amounts of capital) are on the steep part of the production function, meaning that small amounts of additional investment will lead to high marginal returns and rapid growth. On the other hand, high-income countries will experience diminishing returns, leading to slower growth. 

The Reality: Stagnant Wages Amidst Innovation 

But something changed around the 1980s. The internet exploded. Productivity kept climbing – 1.6% a year in the U.S.-  steady as ever. However wages, on average, limped along at 0.7% annually (same EPI data). Suddenly Solow’s models couldn’t explain what was happening. Tech sectors may have minted millionaires, sure, but middle-class jobs? Those started vanishing. Bank tellers were replaced by ATMs. Travel agents faded into search algorithms.  High-paid programmers thrived, whilst retail and warehouse workers juggled erratic hours. The labour market didn’t just evolve—it split. 

Why Wages Aren’t Rising 

Despite rapid advances in technology, average wages have remained stagnant for many years; several key factors contribute to this growing division between productivity and wages: automation, globalization, declining union power, and the increasing dominance of capital over labor. 

Job Polarization:  

Rapid innovation (which can be seen in the 21st century) has led to a ‘back-stabbing’ effect where innovation has managed to wipe out many middle-skilled jobs such as manufacturing, labour, or administrative work. The rise of AI chatbots such as ChatGPT, or the recently released Deepseek AI, has allowed certain companies – such as Uber – to cut down on their cost of production, by making workers in the customer-service sectors redundant. As a result, these workers will be forced to find lower-paying and less stable jobs. This creates the ‘polarization’ effect, whereby the middle-skilled jobs are eradicated, leaving only low-skill and high-skill jobs.  

Globalisation & Outsourcing: 

The rise of globalisation has also resulted in the widening of the innovation-wage gap (the gap between a rise in innovation and the rise in wages), as labour-intensive jobs have become outsourced to countries with lower wages. An example of this is Nike: Nike has currently outsourced over 100,000 workers to China, thanks to its extremely low average wages (roughly $9,000 a year). This has led to downwards pressure being felt in higher-income countries, with even higher-skill jobs now being at risk, as developing countries start to offer tertiary and quaternary services below the market price. Research from the International Labour Organization and the World Economic Forum suggests that this wage suppression effect is widespread, as companies optimise profits by shifting labour costs to regions with cheaper workforces. 

Declining union power: 

Another contributing factor is the decline of union power. Workforce unions, over the last few decades, have played a key role in voicing concerns about low wage rates and securing wage increases – The Guardian (2023). However, since the 1980s, union membership has sharply declined in developed countries, reducing workers’ abilities to bargain for wage rises. In the U.S., for example, union membership fell from 20.1% in 1983 to just 10.1% in 2022 (Bureau of Labor Statistics, 2023). This decline has inevitably coincided with slower wage growth, particularly for middle- and lower-income workers. 

Capital vs. Labour:  

Finally, the increasing dominance of capital over labour has meant that a larger share of economic gains is being captured by investors and corporations rather than workers. As automation and artificial intelligence are driving productivity gains, profits tend to be concentrated among shareholders and executives rather than being distributed as higher wages. This trend is evident in the declining labour share of income across many economies, as documented by economists such as Thomas Piketty in his book ‘Capital in the Twenty-First Century’. 

What can we do? 

As we see the gap between innovation and wages grow further and further apart, we must ask ourselves how we can reverse this effect. In her recent book ‘Considering the Tax Policy Implications of Automation and AI-Enabled Robots’, F. Mann explores the effect of implementing taxes for automation. Claiming that roughly 47% of all jobs in the United States are at risk due to automation, Mann agrees with Bill Gates (founder of Microsoft), that automation and AI must be taxed to revert the effects of globalisation and automation. Other factors which could help to reverse this effect are encouraging local sourcing of labour through subsidies for companies as well as artificially strengthening labour union power. Although all of these will require extensive government intervention and spending, it is the only way in which we can anchor innovation with labour again.