Monday, May 29, 2017

Link Between Low Wages and Low Productivity Growth: High Wages Make Low Productivity Jobs Disappear

Substitution of capital (technology) for labor becomes more profitable as wages rise.

Link Between Low Wages and Low Productivity Growth: High Wages Make Low Productivity Jobs Disappear
Dean Baker


Ryan Harris said...

MMT requires a JG and therefore a direct mechanism by which productivity rises not only for the individual but for society as a whole when wages are higher. If this argument fails, MMT fails.

Penguin pop said...

JG is like the bedrock of automatic stabilizers essentially, similar to how food stamps and current welfare programs work, except targeted at getting to and maintaining full employment from what I understand, even in downturns.

Kaivey said...

Margaret Thatcher said we can't live beyond our means and so brought in austerity and cut public spending. Thatcher's household budget economics appealed to a lot of people because they didn't have much money and were always cutting corners. The fact most businesses have to borrow to start up before they can earn profits lost on them. The fact that everyone has to borrow to buy a home which was a good investment was also lost on them.

I remember reading how many of the non unionised southern blue collar workers complained that unions made goods more expensive. They were told this, of course, and how the minimum wage affects jobs. But there is no getting away from the fact that workers have to earn the wages to be able to buy the goods, otherwise the system jams up.

Every business wants low cost labour, but every business needs competitors who pay reasonable wages to their staff if they are going to have customers.

For many people, though, all this is all counterintuitive, so vote for austerity.

I remember when I was young apprentice a co-worker told me that good wages caused companies to invest, and this advanced society increasing the standard of living. The penny dropped then.

Peter Pan said...

An economy where everyone is unemployed, homeless, and eating insects to survive is the logical end for austerity.

AXEC / E.K-H said...

New macro-micro thinking about the labor market
Comment on Dean Baker on ‘Link Between Low Wages and Low Productivity Growth: High Wages Make Low Productivity Jobs Disappear’

Labor market theory has two aspects: macro and micro. The macroeconomic equation for the relationship between average wage rate and employment says that the average wage rate must rise in order to increase overall employment.#1

In the second step, differentiation comes in. Different productivities for different firms that sell on one market with one market clearing price means that the profit decreases from the highest productivity firm to the lowest productivity firm. Let us assume for the moment that the profit of the marginal firm is zero.#2

It is obviously not so smart to increase the wage rate in the marginal firm. So, what has to be achieved is to satisfy BOTH the macro condition of a rising average wage rate and the micro condition of not to push the marginal firm over the cliff.

To look, in good old Econ 101 manner, only at the marginal worker in the marginal firm prevents the solution of the employment problem.

Egmont Kakarot-Handtke

#1 See Wikimedia
and ‘Full employment: thinking like the macro-boss’

#2 For details see ‘Schumpeter and the Essence of Profit’