That comes from taking capital and entrepreneurship as a stock and labour as a flow. I could assume that at a given wage labour is a stock and additional capital is a flow – this would tell me that all the surplus should go to those that own capital. Ultimately both models are wrong – the surplus is divided based on the relative bargaining power of workers to capital owners.

“Recenlty – yes. Between 1982 and 2001 the majority of the population saw a decrease in market income ”

That is a random time period to choose! I know you will say it was during ‘free market reforms’ (except the last two years and the first two years). However, over this period we had a collapse in the terms of trade, a tumble in the exchange rate – which hurt importers of goods and inputs (it would have helped exporters, but of course they were having subsidies taken off them, so they were hardly in a position to hand out this surplus), income inequality also rose as some policies were implemented that were either inappropriate or badly timed. So why should it be corrected, wage growth and firms profit margins eased.

“On top of that, firms in NZ are still reporting profit increases far above the wage increases so it still seems that productivity in NZ is not being adequately rewarded.”

I don’t think I’ll take a search for profit increase in the NZ herald as an objective measure of firms’ profit margins 😉 – after all, firms aren’t reporting their real profit, its nominal, and this is a biased sample of firms (as they are more likely to push a story about them doing well than badly). Ultimately, firms’ profit margins are squeezed, productivity growth has sucked, and labour has managed to get some real wage increases – this implies to me that productivity is being more than rewarded, and it is currently at the cost of the firm.

So why are firms willing to take on these costs for now? Well they expect productivity and margins to improve. Between 2002 and 2005 they invested heavily in capital, they are just waiting for labour productivity to rise as a result – and for some of this improvement in the terms of trade to trickle through.

if our wages don’t reflect the value we create to the firm then I am all for wage increases, but I see no real reason to pay someone more than the the value they create for the firm, it just doesn’t make sense.

You do realise that if all the people at the firm were paid the value they actually created for the firm the firm wouldn’t have any profits don’t you?

Wage growth is at record highs (LCI, QES) and firms’ profit margins have been squeezed tightly over the same period (PPI inputs). As a result, I would disagree with that assertion.

Recenlty – yes. Between 1982 and 2001 the majority of the population saw a decrease in market income (Prosperity for All?, Brian Roper, p. 35, figure 2.1). There is nothing to suggest that this decrease has yet been corrected.

On top of that, firms in NZ are still reporting profit increases far above the wage increases so it still seems that productivity in NZ is not being adequately rewarded.

I know what you’re saying 😉

““record highs” you are talking about are based on recent year on year growth – taken over a longer period we are still tracking below Australia and other countries”

Yes, as labour markets have also been tight in Australia, and productivity is higher, and they have had one hell of a big terms of trade increase (dry commodities have outperformed soft commodities). All these factors play a important part. However, 6% wage growth when productivity growth was near 0% – employees are getting a pretty damn good deal in that case.

“The simple fact is that if labour costs more there is a incentive to use it more effectively”

Firms’ already have an incentive to use labour more effectively – it’s called profit maximisation. Firms might not do it immediately, but they do it over time. Industries are dynamic, things such as ‘creative destruction’ and firms constantly reinventing themselves help increase labour efficiency far more than ad hoc regulation.

Government has a huge role to play in the education section of the labour force, however when it comes to employer-employee relationships the governments only role should be one of fairness, not efficiency.

“I would say from experience that workers’ contributions are hardly if ever taken into account in wage negotiations”

This depends on market power ultimately. If workers do not have market power, they have trouble negotiating themselves a fair wage. Again that is a equity argument for intervention, not an efficiency one. It is definitely valid, just not in the case of labour productivity. Furthermore, productivity growth actually has significant explanatory power in explaining wage growth – implying that workers probably do get some of that value they create back.

“generally the overriding factor is how mush the employer can reduce labour costs or slow wage growth in order to deliver as large a profit as possible”

I agree that the target is profit, however firms are entities made up of large divergent groups. Those at the top do realise that they have to incentivise workers, that is why they spend so much money on consultants to help them. There is a lot more focus on building the firm as an organic entity nowadays, rather than just trying to achieve bottom-line – that is because this type of firm structure is more efficient.

I agree that there is probably an imbalance in bargaining power between employers and employees. But workers shouldn’t be given enough bargaining power to to be able to negotiate wages that are greater than the value they create to the firm, that will only create unemployment. In many industries it is very hard to measure an employee’s contribution to the firm I don’t deny that.

A- The simple fact is that if labour costs more there is a incentive to use it more effectively. Better investment in capital is one of the ways this is done.

Your comment about proportion to our contribution is more complicated as it veers into the idea of how we attribute “value” and this rapidly becomes a relativistic argument. I’m guessing you would argue that the market automatically attributes value (forgive me if I’m wrong) but there are so many real-world examples of this failing that I simply can’t take it seriously. I would say from experience that workers’ contributions are hardly if ever taken into account in wage negotiations – generally the overriding factor is how mush the employer can reduce labour costs or slow wage growth in order to deliver as large a profit as possible.

“The money is there and we have helped make it. We’re just not seeing it in our wages.”

Matt’s comment aside,we deserve it in proportion to our contribution, if our wages don’t reflect the value we create to the firm then I am all for wage increases, but I see no real reason to pay someone more than the the value they create for the firm, it just doesn’t make sense.

Wage growth is at record highs (LCI, QES) and firms’ profit margins have been squeezed tightly over the same period (PPI inputs). As a result, I would disagree with that assertion