Wages and Productivity Growth in a Dynamic Monopoly

This paper studies the intertemporal problem of a monopolistic firm that engages in productivity enhancing innovations to reduce its labor costs. If the level of wages is sufficiently low, the firm's rate of productivity growth approaches the rate of wage growth and eventually the firm reaches a steady state where its unit labor cost remains constant over time. Otherwise, it will gradually reduce its innovation effort over time and ultimately terminate production. Productivity dependent wage differentials do not affect productivity growth in the steady state; they increase, however, the firm's long--run equilibrium cost level.