Economic Myths Part 4
Tuesday, March 24, 2009 3:56Continued from Economic Myths Part1 , Economic Myths Part 2 and Economic Myths Part 3
According to economic theory there is a tendency in the market place for every factor, including labour, to receive the full value of its marginal product. This means that labour, for example, will tend to get the full value of its additional output. From this we can deduce that rising productivity in a free market should be accompanied by a rise real in wage rates. In other words, real wage rates will move in the same direction as productivity. If doesn’t happen then the theory is wrong.
Fortunately there is abundant evidence to support it. First, only countries with rising productivity have enjoyed rising living standards. Second, about 6 years ago Bank Credit Analyst, a Canadian group, did a study showing that real wages in America had in fact increased in line, as the theory predicts, with the rise in value productivity. (Economists think of productivity in value terms rather than physical terms).
Bank Credit Analyst’s findings have been supported by other studies and authorities. Professor Robert Gordon of Northwestern University points out that wages and productivity are the obverse of each other when he says: “[W]e start with a definition about which there can be no controversy at all: growth in the real wage is equal to growth in output per hour plus the change in labor’s share.” It’s true that productivity is a slippery concept. But whichever way one looks at it real wages have moved in line with it.
Part of the confusion has been caused by divorcing the gross wage rate from the net rate. And it’s the gross rate that matters to the employer and not the net rate, which is what’s directly received by employees. The gross rate includes all additional labour costs which not only includes ‘non-wage’ benefits but also payroll taxes. In 1950 employee benefits have risen from 20 per cent to about 40 per cent of the gross wage. Once these oncosts have been factored in and the necessary adjustments for inflation made we find that gross wage rates have behaved as predicted by the theory.
Continued at Economic Myths Part 5
