Feedback Loops and the Matthew Effect

From the Boston Globe:

WHILE DIFFERENCES IN talent explain at least some of the gap between haves and have-nots, two economists at MIT and Harvard think another factor is also at work. They theorize that the ability to dedicate yourself to work – and not worry about problems at home – has an amplified effect on your productivity and, thus, your income. This can happen simply because a higher income allows you to more easily accommodate or outsource many of the hassles of home life, which then sets up a virtuous cycle of more dedication to work, more productivity, more income, easier home life, more dedication to work, etc. Conversely, to the extent that you cannot dedicate yourself completely to work, you may find yourself in a poverty trap. This explains some of the nation's income disparity, the authors say, but it can also explain some of the gap between the developed and developing world.
Banerjee, A. and Mullainathan, S., “Limited Attention and Income Distribution,” American Economic Review (May 2008).

I think that there are many, many different interrelated virtuous and vicious circles that help explain increasing wage dispersion. Consider the fashionable  “Getting Things Done” personal productivity system. Highly educated people with complex schedules and multiple responsibilities not only find these kinds of systems helpful in getting things done, but also  for maintaining a sense of control and self-efficacy, which diminishes stress. If productivity goes up while anxiety goes down, more can be done in a period of time, more happily. Increased productivity tends to increase wages. Higher wages create an extra incentive to work more hours. But if productivity and workflow management technologies and practices increase a sense of control and self-efficacy, the wage incentive will be amplified, and even more labor will be supplied. Of course, practice makes you better, so people who work more also tend to work better, which eventually gets reflected in wages. And so on.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center