So there is a big debate raging in the New Zealand blogosphere about the exodus of labor to Australia. Matt
joined in on the debate and made the very valid point that it’s real wages we need to care about, not the nominal wage and that for this happen we basically need productivity increase so that output increases. The same people with more money buying the same set of goods will just push prices up leaving us where we started.
While I don’t want to wade heavily into the debate, I’m still undecided what the best course to take is as I’m not totally convinced by the arguments from the left or the right. The one thing that does bother me is that strengthening employee power to negotiate higher wages seams to be though of as a magic wand. In line with Matt’s argument, giving workers higher wages doesn’t really do much if there isn’t a corresponding increase in productivity. People seem to have the causality all wrong, in general increases in productivity increase wages not the other way round.
Wages are supposed to reflect the productivity of the worker. If for some reason wages don’t reflect the productivity of the worker then there could be an argument to strengthen bargaining power so that we return to the situation where the marginal productivity of a worker is equal to the marginal cost to the firm of hiring them. No one seams to be making this argument though. (please correct me If I’m wrong). Although The Standard does cite CTU economist Peter Conway who says the wage gap
“will only be closed through more widespread industry wide collective bargaining, supported by ongoing improvements in productivity”
Now I know someone is going to bring out the “Efficiency Wage” trump card and say that paying higher wages does increase productivity, a commenter on our blog even used the Ford motor’s example as proof. Now I don’t really have a problem with efficiency wage theory, i just don’t people really understand how it works. Paying an artificially high wage increases productivity primarily through making workers not want to lose their job since it’s so high paying. People work harder, turnover falls everybody is happy and productivity increases. The problem with applying this argument to the economy as a whole is that if everyone is paid more you don’t have the same incentives because the opportunity cost of losing your job is lower. Efficiency wage theory works really well at the firm level but doesn’t make as much sense at the economy level. If all of Ford’s competitors followed suit and matched ford’s really high wages the incentive for Ford’s employees to work really hard because they get paid so much evaporates.
It’s all about incentives and everything is relative.