Sunday, 5 June 2011

Increased productivity

I suspect many of the opinions expressed by Tapu Misa in this article are incorrect. I do not wish to discuss them save address this comment on wages:
For the first time in American history, rapid increases in productivity have not been accompanied by corresponding gains in wages; at the same time, the minimum wage has lagged behind increases in the cost of living.
It does not seem to me that increases in productivity should necessarily lead to increases in wages. It does seem that it should lead to an increase in standard of living.

Productivity gains should be sought. If a product at least equivalent in quality can be produced with lower cost in labour hours and source materials this is a good thing. As such the seller could make more profit per item. However in a competitive market the seller has an incentive to price the widget below that of his competitor to increase his market share. As such it may be that the profit per widget is unchanged though the cost of the widget to the consumer is less. Other manufacturers can introduce productivity gains and lower the cost of their widget, or improve the widget and sell a higher quality unit for the previous price.*

What I am suggesting is that increases in productivity should not automatically lead to an increase in profit which the socialists advocate be shared with the workers. Rather, in a competitive environment productivity gains should lead to decreased price.

But note that even though this does not increase wages, the standard of living can increase as these cheaper items cost proportionally less of one's income.


*I am aware that some productivity gains coexist with a lower quality item, though a significant drop in price may allow a much larger proportion of society to own items previously the domain of the rich. I am not advocating low quality, but some people may prefer a low quality item over the alternative—no item. And price drops are often proportionally greater than quality loss.

2 comments:

  1. Here's the article to which Tapu refers: http://www.huffingtonpost.com/jerome-karabel/wisconsin-labor-and-the-f_b_828604.html?view=print

    The author of this second article is a professor of sociology, not economics (although, as I think of it, that might be a point in his favor). I'm guessing when he says "wages", he means "nominal wages" rather than "real wages". Also, there are forms of compensation beyond wages, such as work benefits and leisure time. Dr. Thomas Sowell does a good job in several of his writings detailing the real compensation of "poor" Americans.

    Still, even if he is talking about "real wages", he fails to consider the role bad monetary policy plays in lowering people's income. Every time that the Federal Reserve lowers the interest rate, it is the same as cutting people's pay. Therefore, if people's real income is lower, it is not because of the lessening influence of trade unions but is rather because the government, through the central bank, is artificially stimulating the money supply.

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  2. cavalier, several of your comments are reasonable. And Sowell's commentary is enjoyable, I haven't read his books.

    I read the HP article and several of Karabel's comments make me dismissive. He views unions as good for society when I think much of what they do is counter productive to employees, let alone employers. He mentions inequality which can be a useless measure. And he talks of poverty rates without defining the metric, but the usual ones are rubbish. So I don't hold much hope for his productivity claims.

    But I think we can remove some of the issues you raise. I agree that inflation is bad, and especially bad for the poor. But if we assume 0% inflation, it seems that increased productivity with competition will led to decreased cost of widgets which increases standard of living even if wages are static, as per my post.

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