Wages and productivity growth in a competitive industry

We describe the evolution of productivity growth in a competitive industry with free entry and exit. The exogenous wage rate determines the firms’ engagement in labor productivity enhancing process innovation. There is a unique steady state of the industry dynamics, which is globally asymptotically stable. In the steady state, the number of active firms, their unit labor cost and supply depend on the growth rate but not on the level of the wage rate. In addition to providing comparative statics of the steady state, the paper characterizes the industry’s adjustment path. r 2003 Elsevier Science (USA). All rights reserved. JEL classification: D24; D41; D92; J30