Re: Could increasing productivity cause wages to drop, instead of increase?

From: The Trucker (mikcob_at_verizon.net)
Date: 11/02/04 

Date: Mon, 01 Nov 2004 20:53:43 -0800

Igor wrote:

> Richard Hutnik wrote:
>
>> One line I hear over and over is how increasing productivity is great
>> for improving the wages of workers. To be sure, it can happen that,
>> as workers do more, they improve the value of goods and services
>> provided, increasing wealth, and offering the potential to be paid
>> more.
>>
>> But, does anyone have any research on the cases where increasing
>> productivity actually caused wages to drop?
>>
>> I could see cases where automation is introduced, and less workers are
>> needed. This then drives up the supply of labor in a given market,
>> resulting in the prevailing wage dropping.
>>
>
> This would not drive up the supply of workers. Supply is determined by
> other factors. It is unclear if automation would increase or decrease
> employment of labor. As capital becomes cheaper than labor firms
> substitute capital for labor. This would mean a leftward shift in labor
> demand. The problem is higher automation means more productivity for a
> worker so labor demand shifts to the right. It is unclear what the net
> effect of employment will be. It is unclear which effect would be greater.

It is not at all unclear when you add economic rents (e.g. in the form of
IP rights). This greatly skews the distribution of wealth and creates a
demand side problem. The tendency is then to produce less at lower labor
costs (layoffs) as opposed to using the new capital to produce more. It
is a question of degree here: How much _should_ the owner of the technology
or the capital get? I will not pretend to know the answer, but I will say
that right now he seems to be getting way too much. The result is a loss
of jobs.

> You have to remember that statements such as increasing productivity
> leads to higher wages are ceteris paribus. That means all else constant.
> This is only one piece of the puzzle and one effect. This occurs if
> nothing else changes. So although an economist would say that an
> increase in productivity would increase the wage rate that means if
> supply stays constant and there is not another factor that changes
> demand acting at the same time.

And that isn't happening. The powerful will always try to extract more
rent and that will decrease demand. The purpose of a true representative
form of government is to prevent this.

> To take an example look at the 1970's. Prior to that time real wages had
> risen. The US had seen high productivity growth and a stady but low rate
> of population growth. Through the 1950's were the golden age for the
> blue collar worker. Well that is if you were a white male. Supply grew
> at a slow pace and technology grew fast. This meant increasing labor
> demands were met with small increases in labor supply. Real wages rose.
>
> The 1970's hit and things changed. The Baby boom became of age. Those
> born in 1945 were 18 in 1963 but you have to factor Vietnam and the
> draft kept many of these out of the workforce. Either through the draft
> or the sharp increase in college enrollment to avoid the draft. With
> Veitnam over labor supply grew much faster than ever before. Not only do
> we have the population spike due to high birth rates post WWII but
> demographics changed. Women and minorities were now become accepted in
> the workplace. This meant the golden age for the white male ended. Labor
> supply increased rapidly.

That is actually pretty accurate. I'm impressed.

> Over this period supply grew faster than demand. Productivity did
> increase but not as fast as supply increased. So the effect was lower
> wages. A note of caution when looking at the 1970's is in order. Wages
> dropped but benefits for some reason rose. In the 1970's it was more
> likely for a worker to have health insurance, a retirement package, paid
> vacation, etc. So total compensation, wages + benefits, did not fall.

Again, pretty accurate. More importantly, the poor and the middle class
made major strides against the rich. People saw their cost of living
go down primarily due to the combined effects of home ownership and
inflation. They were able to invest and wanted to invest. The period
of "stagflation" was, in fact, caused by the end of the Vietnam war and
the return of thousands and thousands who had been employed in that
war.

> Wages fell but workers were actually compensated more than before when
> you add benefits. So it is unclear if workers were actually paid less.
> Yes the paycheck was smaller but you got paid vacation, health
> insurance, etc. which workers did not get before.

Good points all....

> The caveat is not to fall into thinking that because theory predicts
> higher productivity = higher wages that every time you see higher
> productivity you will see higher wages. The problem is this prediction
> as many other economist predictions assumes everything else that affects
> wages other than productivity is constant. In the real world that is an
> unlikely case. An economist has to sum up the net effect over many
> factors before a clear prediciton of what will happen emerges.

The difference between now and then is rents. The Republican trickle
down economic plan is actually a rent seeking plan. Hayek is the "science"
behind the thievery. 

-- 
"I know no safe depository of the ultimate powers of society but
the people themselves; and if we think them not enlightened enough
to exercise their control with a wholesome discretion, the remedy
is not to take it from them, but to inform their discretion by
education." - Thomas Jefferson.  http://GreaterVoice.org

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