ABSTRACT
This chapter provides an explanation for sustainable “equilibrium” differences in real per capita gross domestic product (GDP), as well as for either transitory or “permanent” differences in growth rates that ultimately cause differences in real per capita GDP. High wages serve to pressure firms to become more efficient and innovative, whereas low wages allow firms to engage in less efficient economic behavior, all the while remaining competitive and profitable. Conventional neoclassical growth theory does not rule out the possibility of nonconvergence. In particular, to the extent that technical change or innovations are not transferable interregionally or internationally, there is no reason for per capita GDP to converge. The chapter explores that one can develop a reasonable endogenous theory of economic growth by introducing wage rates as a causal determinant of the extent and rate of x-inefficiency and technical change into the Robert Solow growth model.
