There are more economic fallacies than you can shake a stick at in this New York Times editorial: “Let’s talk about higher wages.”
The writers start off by criticizing “The conventional wisdom (which) held that productivity growth was the only route to higher wages. Through that lens, efforts to negotiate or require higher wages were counterproductive. Minimum-wage law would raise unemployment because there was only so much money in the wages pool, and if some people got more, others would get none. Collective bargaining similarly was derided as a scheme by some workers to take money from others.”
True, all true. Not only is productivity growth a necessary and sufficient condition for rising wages, it also accounts for their present levels. LeBron James takes home a hefty paycheck because he adds magnificently to the bottom line of the Los Angeles Lakers. I garner a middle-class wage because I offer my employer an intermediate level of productivity. And the guy pushing a broom around is paid less since his contribution, in terms of value added, is even more modest.
Suppose workers can produce at the rate of $20 per hour. If they are paid more than that, their employer loses money on them, and bankruptcy beckons. But suppose they are compensated, only, to the tune of $12 hourly. Then their company earns a pure profit from them of $8 per hour. Is this a tenable situation? Is this likely to last? Have we here reached an economic equilibrium? Of course not. These employees then become a target for competing firms. One of them, at least theoretically, will offer $12.01; another $12.02, and then we are off to the races. Where will it end? In equilibrium at $20, since at any lower wage there will still be profits to be made from continuing to lure laborers away from their present employer. As the market abhors profits, just as nature abhors a vacuum, this process will continue to that point, ignoring transactions costs. Yes, artificial wage boosts such as the minimum wage, or threats from organized labor lead only to unemployment for the unskilled and to rust belts.
But the New York Times is having none of this. Here is their critique of what I consider to be the correct “conventional wisdom”:
Tug of war- bologna! One side prefers infinite remuneration; the other zero. Do market wages reflect a halfway point between the two?
There is absolutely no warrant for maintaining that “power” is determinative. Rather, what the top athlete or movie star has vis a vis the floor sweeper is the ability to garner revenue for his employer; that is, productivity. This is not at all obvious because it is exceedingly difficult to assess this attribute. A case in point is the failure of experts to accurately measure that of Jeremy Lin. No the best measure of productivity is the market wage. If wages have not risen, then, neither has productivity, on average.
What evidence of the divergence between compensation and productivity is offered by these editorialists? It amounts to no more than pontifications from a bunch of pointy-headed professors with brief-cases. If entrepreneurs guess wrong, they lose money and/or cannot keep their work force away from competitors. What did those academic intellectuals lose when they mis-assessed productivity? Nothing much. It beggars belief to think that productivity has “more than doubled” while wages hardly budged. In our numerical example, this would be akin to saying that productivity rose from $20 to $30 per hour and wages only increased to, say, $23. This would leave a profit gap of $7. Is it seriously contended that market forces would leave matters at that point? That no employer would try to “steal”, aka, “attract” labor from this firm by offering $24? Or $25?
But what with the advent of computers, the web, Google, Facebook, et al.? Isn’t it obvious that productivity has risen, while real wages have indeed, lagged? Yes, true. But regulations have also increased. As have wokeism, cancel culture, and political correctness, increased, and this too would have the very opposite effect. So would increasingly pervasive affirmative action, which continually promotes people to positions for which they are not qualified. Employees get promoted to their level of incompetence; there is even a name for this sort of thing: “The Peter Principle.” This alone might have more than offset technological gains in productivity.
Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans
READER COMMENTS
Dylan
Aug 19 2021 at 3:50pm
As you say though, productivity of employees, particularly white collar ones, is exceedingly difficult to measure. What do you make of the alleged rise in people using remote work to secretly work two supposedly full-time jobs? The people that were making $250,000 a year and have now doubled it, did they really become twice as productive?
I’ve mentioned this previously, but a large part of my career has been working for companies that will never make a dime of revenue, let alone be profitable. That’s the standard in the industry I was in. Many people in that field will bounce from one company to the next after the venture capital runs out. How is their productivity measured?
You also mention how regulations have increased. You don’t draw the conclusion that this has also led to increased market power and the ability for those companies to pay more than the productivity of an individual employee without having to suffer the consequences of that through increased competition.
Mark Brophy
Aug 21 2021 at 12:53pm
There are too many organizations that provide jobs but don’t generate revenues and many others that are paid for goods and services but do not earn profits and never will. A big chunk of activity is unproductive socialism that threatens prosperity.
Floccina
Aug 19 2021 at 5:24pm
A guy made this challenge to that thinking to me once:
If all the arena workers in all the arenas where paid $7.25/hour and the minimum wage was increased to $15.00 and demand for seats was very elastic wouldn’t Leborn James productivity fall and the workers productivity rise?
Philo
Aug 19 2021 at 8:27pm
If you change the conditions under which people are allowed to operate, you can change people’s productivity. Another example: Jackie Robinson’s productivity rose a lot when major league baseball was integrated.
Bill
Aug 19 2021 at 8:49pm
The alleged decoupling of labor compensation and productivity is a myth. Such claims focus on wages rather than total labor compensation. Also, the errors are committed related to the use of proper indexes to convert nominal values to real (inflation adjusted) values. This piece speaks to these issues:
https://www.wsj.com/articles/SB10001424052702304026804579411300931262562
Matthias
Aug 20 2021 at 2:14am
Yes, that is a pretty silly myth.
Especially since what they actually want to say doesn’t depend on measuring neither productivity nor inflation:
If you want to check whether workers have been getting a worse share over time, you can just look at the labour share of GDP over time.
Since you are dividing one nominal value (total labour compensation) by another (total GDP), no compensation for productivity or inflation is necessary.
To save the reader the hassle of looking things up:
The labour share of GDP has slightly gone down in the US in the last few decades. From something like 60% or so to something like 50%.
That might be worrisome, or it might not be, I don’t know. But it’s a much more modest change than these alarmist articles make you believe. They always sound like we are talking about orders of magnitude.
(The more important consideration is perhaps the gap between eg average and median wages.
If that one widens, it might point to winner takes all economics in the labour market.
But that paint a picture of ‘insiders bad’ not of ‘capital bad’, I guess?)
Bill
Aug 20 2021 at 10:25am
Here’s a recent piece on “labor’s share”:
https://taxfoundation.org/labor-share-net-income-within-historical-range/
James
Aug 20 2021 at 2:12pm
Labor share of GDP is much more stable than you are suggesting:
https://fred.stlouisfed.org/series/LABSHPUSA156NRUG
Mark Brophy
Aug 21 2021 at 1:00pm
It’s not desirable for wages to fall from 60% to 50% of the economy when the Federal Reserve prints money to prop up the stock market. The government should be not bestow favors on any faction, it should be a neutral referee.
Bill
Aug 22 2021 at 11:13am
From the link I posted above: “The chart below shows labor and capital shares of net income over a 92-year period, indicating the labor and capital shares are now very close to their long-run averages. The average labor share from 1929 through 2020 was 69.2 percent and the average capital share was 30.8 percent. In 2020, the labor share was 68.9 percent, and the capital share was 31.1 percent—well within historical range and far from a supposed decades long decline in labor share.”
Phil H
Aug 19 2021 at 9:42pm
Fallacies everywhere.
(1) The conventional wisdom I was taught is that prices depend on supply and demand. Look at the famous X graph taught in econ 101. Productivity (value) does not appear on it. (It’s a factor that affects the position and shape of the supply curve.)
(2) The big problem with talking about productivity is that Block treats productivity as internal to the worker. It is absolutely not internal, particularly when talking about low-wage workers. The productivity of a low-wage worker is 100% dependent on the organization for which they work, not on their own skills. (Actually, it’s true for high-paid workers as well. I sell my white-collar labour (translation) at very high prices. Most companies won’t pay my prices; a few will. Their willingness to pay has nothing to do with my productivity, and everything to do with the client’s ability to make use of my products.)
Mark Z
Aug 19 2021 at 11:00pm
The employer’s ability to make use of your products is your productivity. If your point is that different companies can make better or worse use of you, fine, but that is absolutely a function of your ‘internal productivity.’ To assert otherwise is to assert that everyone is completely interchangeable. I’d also bet (this is certainly my experience at least) that offers from different companies don’t vary that much about the mean. After all, if Exxon can get twice as much out of you as BP, what’s to stop BP from changing their business model to mimic Exxon until they can get as much out of you?
Phil H
Aug 21 2021 at 10:40am
“everyone is completely interchangeable”
Yep, that’s kinda the point. You have to design a job so that anyone (who fits certain criteria) can do it. If I want to hire a teacher, I need to create a position that pretty much anyone with a teaching credential can do. Otherwise, I won’t find an employee. When we’re talking minimum-wage, low skill jobs, they do have to be jobs that pretty much anyone can do. Like zero-experience teenagers.
“offers from different companies don’t vary that much”
Of course they do. Look at the wages for a bike courier in New York and Mexico City, or Santiago. They’re massively different. Similarly, I’ve been paid a very decent salary by a tech giant to do a job that would net me ~40k elsewhere.
Jon Murphy
Aug 21 2021 at 12:20pm
Because the workers are massively different in terms of productivity.
Jon Murphy
Aug 21 2021 at 1:01pm
I’m not seeing where your assumption that, for competition to work, everyone must be identical is coming from. It’s neither based in economic theory, the real world, or even the internal logic of your argument, Phil.
Jon Murphy
Aug 20 2021 at 7:35am
Phil: you’re incorrect on both accounts.
First: supply curves depend on the productivity of inputs (labor and capital). Any intro textbook covers that. See, for example, Chapter 3 of this free textbook I use in my classes, especially sections 3.1 and 3.2.
Second: Block does not assume a labor theory of value. The theory he discusses falls apart if we assume intrinsic productivity. Productivity depends on the value produced; value is subjective, not intrinsic. A sports player can become unproductive overnight if people stop valuing sports.
Knut P. Heen
Aug 20 2021 at 5:22am
If a CEO identifies slack in the organization and removes it, the productivity per worker will increase and the compensation of the CEO will increase. If the individual worker did not contribute to the increase in productivity, wages will remain as before. If the individual worker now works a little bit more efficiently, wages will increase a little bit.
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