Re: How does productivity turn into higher wages?

From: Igor (jjweatherby_at_houston.rr.com)
Date: 01/23/05 

Date: Sun, 23 Jan 2005 01:24:12 GMT

sinister wrote:
> <royls@telus.net> wrote in message news:41ec1073.6005884@news.telus.net...
>
>>On 17 Jan 2005 08:21:29 -0800, zerge@hotmail.com wrote:
>>
>>
>>>As productivity increases in an industry or in a country, salaries tend
>>>to rise.
>>>Can anyone explain the cause-and-effect that leads to this dynamic? And
>>>I mean at the decision maker level: what happens in the minds of the
>>>employers and employees?
>>
>>It's just that the increased production has to go _somewhere_.
>
>
> But if the increase in productivity is due to investments in capital, why
> does some of it end up in increases in wages and not a yet higher return to
> capital?
>
> I assume it's supply and demand in the labor market.
>
>

Investment increases wages because each worker is more productive. This
means firms will get more output for a worker. They are willing to pay
more. If the economy is at the natural rate of employment what happens
when new capital is added? Firms see that for the same wage they get
more units of output. More profit. So they want to hire more workers.
The problem is at the current wage no one else wants to work. How do you
get more people back into the work force? You offer them more wages and
see if they will work then. So wages begin to rise. This is how it
translates into wages.

As for returns on capital, with more capital returns begin to drop
because there is more capital and the same number of workers. This means
there is not enough people to run the machines. The return to labor
rises because they are more productive. As the wage rises the returns to
hiring labor drop to meet the now lower return on capital.

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