ProductivityAndWages

Context : OnProductivity

Very interesting post on StumblingAndMumbling

• http://stumblingandmumbling.typepad.com/stumblingandmumbling/2006/05/productivity_an.html

Quoted in full (CategoryCopyrightRisk)

Why have real wages stagnated for the poorest Americans? Why do so many young people want to work in "creative" industries such as journalism, music and acting? Could Marx be proved right in his forecast that productivity growth would eventually reduce wages?

A fascinating paper by Gilles Saint-Paul in the latest Economic Journal (early version here) sheds light on these questions - and suggests Marx might be right.

The key feature of his model is bounded utility - the notion that our needs are limited, and indeed satisfied. When this is the case, productivity growth reduces wages, in two ways.

First, if our needs for a good are satisfied, we won't buy much more of it as prices fall. The upshot is that rising output per worker will lead to fewer workers - as has happened in agriculture.

Second, if we live in a world of abundance, we'll become less sensitive to higher prices, because higher prices don't much reduce our ability to buy other things we need; think of footballers' wives buying high-margin designer clothes. As price-insensitivity rises, so does monopoly power. So firms' mark-ups over wages rise and real wages fall.

In such a world, Marx will be right. Maybe this explains why real wages for the poorest American workers have stagnated for years.

Which raises the question. Why has productivity growth, generally speaking, led to higher real wages over time?

The key, says Saint-Paul, lies in distinguishing two types of productivity growth - the ability to produce existing goods more efficiently, and the ability to produce entirely new goods.

It's new products that cause rising real wages. These create new needs - hence raising demand for labour - and create competition for existing ones, thus limiting the rise in margins and raising real wages.

Hence the increased desire to work in creative occupations. The wisdom of crowds knows that its in these that productivity growth will lead to a higher demand for workers. In existing producing industries, real wages will fall with productivity.

Without this increased variety of goods, Marx could be right.

Which raises the question. Is increased product variety and innovation an integral part of capitalism - in which case Marx will be wrong forever - or has capitalism just enjoyed 200 years of good luck in discovering new products?

See also :

• CreativeClass makes genuinely new goods

• If we move up the HierarchyOfNeeds to SelfActualization, maybe PeerProduction is better at providing the social, cultural goods that matter. So we hit the limit. (TheAgeOfAmateurs)

• ClassWarBetweenProductsAndServices

• My comment on that blog article (LuxurySector)

: I wonder if, as we move up some kind of "hierarchy of needs" to look for self-actualizing products, these are actually better provided by commons-based peer-production rather than traditional exchange markets.

: The more "luxury" a brand is, essentially the more its value is derived from social practice and perception and meaning than any scarce material. Social practice and meaning is increasingly being well articulated in, say, the blogosphere. (Look at a blog like Gaping Void for an example of the transition : a synthesis of free artworks and culture interwoven with a world of high-priced luxury items.)

: Creatives (who are those inventing new products and needs) have always lived in a mix of commerce and cultural gifting. Now that the internet lets them work virtually, away from high publishing and distribution costs, it may be that increasingly, the new services created, won't be available within the market but within the "peerosphere". The market shrinks as a proportion of what matters to humans, and naturally wages fall. But other kinds of currencies (attention, reputation, connections) become more important.