Do you think wages should keep up with productivity growth or do you agree with the following comment?

Question

Someone reciently commented in an answer about the failure of wages to keep up with productivity growth.

"Most of the gains are a result of new machinery/technologies, which were provided from investments by the capital providers (ie, the owners). Why is it that you think that workers should benefit from improvements that they have had no impact on? SHOULD they get paid more for pushing a button instead of manually performing a task?"

I was surprised by this and wonder if this is now a common point of view. According to classic economic theory wages are determined by the marginal product of labor, that is the extra value of the last worker hired. Increases in productivity have alway be the result of of "new machinery/technologies, which were provided from investments by the capital".

I was really interested the behavior of economy as a whole, not individual companies. See
http://www.visualizingeconomics.com/2007/11/04/has-middle-americas-wages-stagnated/

Answer 1

Hi Meg - very interesting question. I think the comment really concerns the sharing of the gains from productivity between employees and owners (or shareholders etc). In some respect I can definately see the argument here - that the owners are putting up capital to improve the employees output. To me its simply a question of negotiation. To little sharing and employees will become disgruntled and productivity may well suffer - the worst case being a strike action. On the other hand - too much sharing and owners will question the efficiency of marginal investments in the company. Their return equations directly depend on the share of productivity that is paid out in wages. Too much payout and future investment may be jeapordised. Workers will argue (often collectively) from one side and owners from the other. Rather than approaching it from a rule of thumb point of view - i reckon that you need to view this as a continuous process of negotiation in a global economic environment. Some firms are more generous to their workers - and therefore attract better quality workers - who presumably have a higher productivity input than lower quality workers. Not all workers are equal (low skilled, semi-skilled, professional etc) and also the picture by industry group will also differ markedly. Some firms see fit to employ child labour in the developing world - generally capital will seek to optimise returns from capital and labour. The developing countries are taking lower value added work from developed countries where the labour cost is deemed too high. In these countries - labour has no real vote and cannot pressure for a share of productivity gains.

I'll stop now as i'm rambling a bit i hope this adds something.

Answer 2

You're asking about "common" points of view regarding arcane economics principles such as wages and the marginal product of labor? You must not hang around the same type of people I hang around with.

First, on such an issue there is no "should"; only what is and is not.

Second, I'd easily dismiss the commenter's view -- obviously productivity gains are not limited to the people who fund the technology companies that invent things that improve productivity. Everybody has a phone. Only one guy invented the phone, and he's long dead. Irons (for clothes) used to cost $60 in the late 1980s. Now they cost $10. I benefit from that even though I've never supplied capital to any company that makes irons, and that price tag affects my "real income".

Relatedly, I've never heard of a pile of money inventing anything. Key innovations do not always require capital, but they always DO without exception require labor. So far it is only people that invent and create.

Third, but the above does not necessarily mean that real incomes (mean, median, household, individual, whatever) perfectly track with productivity gains in the relatively-short term (I'd suspect it goes in years-long fits and starts) Consider supply & demand for labor in the different segmentations of the labor market, and it's clear what a very simplified model of the real world the "marginal product of labor" represents.

So finally, I do think it's clear that broadly speaking, productivity gains do make the vast majority of people economically better off over time. Poor people in 30 years will be enjoying material benefits that affluent people today cannot even dream of. It's trickier though to analyze specific changes in wages or income over time, as that is burdened by terrific measurement problems regarding income and inflation and consumption patterns. I have yet to see it handled well at all.

Answer 3

I don't think wages "should" keep up with anything in particular.

In fact, productivity often causes wages to decrease with in segments. For instance, containerized freight. It made thousands of dock wokers no longer needed and significantly decreased the wages of the rest. If productivity and wages are to be considered together, would you begin containerizing freight? Only if the productivity is more important than the wages. If had tried to peg wage increases to the productivity improvements, you would make unemployment even higher than it was already made.

I don't think you can peg wages to productivity without creating a host of problems.