Re: How does productivity turn into higher wages?

From: Bill (xxx_at_yy.zz)
Date: 01/26/05 

Date: Wed, 26 Jan 2005 20:30:58 GMT

"Igor" <jjweatherby@houston.rr.com> wrote in message
news:CXCId.54605$Ta2.5729@fe2.texas.rr.com...
> Bill wrote:
>> <zerge@hotmail.com> wrote in message
>> news:1106077002.589121.211450@f14g2000cwb.googlegroups.com...
>>
>>>Bill wrote:
>>>
>>>>"Igor" <jjweatherby@houston.rr.com> wrote in message
>>>>news:dS_Gd.26183$Ta2.13935@fe2.texas.rr.com...
>>>>
>>>>>wilfred wrote:
>>>>>
>>>>>><zerge@hotmail.com> wrote in message
>>>>>>news:1105994298.131535.139850@z14g2000cwz.googlegroups.com...
>>>>>>
>>>>>>
>>>>>>>r...@telus.net wrote:
>>>>>>>
>>>>>>>
>>>>>>>>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?
>>>
>>>>>It is very simple. As productivity rises firms wish to hire more
>>>
>>>workers.
>>>
>>>>That may not be true. For example, if you fully automate a factory
>>>
>>>you may
>>>
>>>>need less people.
>>>>
>>>>Bill
>>>>
>>>>
>>>
>>>Less people per unit produced, sure. But not necessarily less people in
>>>absolute terms. Productivity and number of workers in absolute terms
>>>are independent variables.
>>>
>>
>>
>> Could be less and could be more. They are not quite independent. If you do
>> nothing nothing you need the same number of people per unit of volume. If
>> you do a massive automation it is possible that you may be able to increase
>> your production to something far beyond what you could sell with far fewer
>> people.
>>
>
>
> They are independent. If prices stay the same and cost of the product drop,
> unless there is a capacity constraint firms will produce more output. This
> will cause labor demand to shift out. At each wage they will want to hire
> more workers than before.
>
> Where the confusion is is that firms will hire more workers if THE WAGE
> STAYS CONSTANT. Without an increase in the supply of labor this will not
> happen. Wages will likely rise over time but unless there is a change in
> supply, firms will hire more workers in the short run. There is just more
> profit to be made for a good and the increase in production will fuel more
> workers being hired eventhough it takes fewer workers to produce one unit.
>
> The second part of the confusion is that you are talking about substituting
> capital for labor. The analysis is short run so capital does not get
> substituted for labor. Productivity can rise for reasons other than new
> capital. New process can be implemented, eg. the assembly line. This cuts
> cost and makes production faster but no new capital is involved. Workers may
> be trained in new techniques. There are other reasons for productivity gains
> than new machines.
>

I'm really not following you. I'm talking about a micro economic situation
where I talke a factory that used to employ 100 people and I completly
automate it with new machines etc. It now employs 10 people and can produce
far more than I can sell. In this case, my increase in productivity caused me
to have less workers.

Bill

> However, if Wages rise above capital there is a possibility that
> substitution can happen. In this case the effect is indeterminate.

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