How structural reforms of labor markets contribute to a productivity crisis. An essay on neoclassical versus evolutionary efficiency

Structural reforms of labor markets, as proposed by supply-side economists, are a cause of the post-2005 productivity crisis in the Triad (USA, EU, Japan). Structural reforms removed labor-market rigidities that were useful for innovation. Labor markets that work better (in a neoclassical view) are working worse from an evolutionary innovation perspective. Negative effects are worst if innovation requires a highly cumulative knowledge base. Low productivity growth leads to a labor-intensive growth path and hence to tighter labor markets. The latter can increase wage costs, thereby enhancing the diffusion of process technology and a return to higher productivity growth. Innovation and productivity would also be supported by more protective labor market institutions.