I can give some US evidence from Martin Feldstein, “Did Wages Reflect Growth in Productivity?” This paper was prepared for presentation at the annual meeting of the American Economic Association on January 5, 2008.

Feldstein writes

“The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity.

More specifically, the doubling of productivity represented a 1.9 percent annual rate of increase. Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same nonfarm business sector output price index.

In the period since 2000, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).”

And later he says

“The relation between wages and productivity is important because it is a key determinant of the standard of living of the employed population as well as of the distribution of income between labor and capital. If wages rise at the same pace as productivity, labor’s share of national income remains essentially unchanged. This paper presents specific evidence that this has happened: the share of national income going to employees is at approximately the same level now as it was in 1970”

The notion that you would hire less people to increase productivity (i.e. a move along the labour demand curve) ignores the fact that while your labour productivity (by which I mean the marginal product of labour) has increased, the productivity of your capital (marginal product of capital) will fall. It seams bizarre that you would make inefficeint use of your capital to make labour more productive.

Even though it can increase wages, this only matters if you have that as your sole objective.

That is the problem with the NZ Left, epitomised by the myopic unionists at the Standard; they are incapable of considering things outside of their single (power base related) issue. EVERYTHING is about labour. EVERYTHING is considered in the context of labour. There are the workers and bad people. It’s Us vs Them on every issue.

This special form of ideological blindness embarrasses them in adult conversation, and prevents them from considering anything other than the deceptively obvious solution.

“Once again. Productivity growth does not necessarily mean growing the pie. The NZ pie grew considerably in the last 9 years with quite low productivity growth.”

Indeed – we borrowed significantly to fund this increase in the “pie”, which means that we now have to pay it back as we aren’t “producing more”.

“I also didn’t say that Labour and Capital have to be perfect compliments just that you overstate their complementarity in order to gloss over my point concerning the growth/productivity relationship without addressing it.”

I said that if we have constant or increasing returns to scale then productivity and growth do not move in opposite directions (in the absense of exogenous factors) – this isn’t overstated at all, it is a common result from endogenous growth theory and the data associated with it:

http://en.wikipedia.org/wiki/Paul_Romer

“I think the real issue is you are unwilling to address exactly where bargaining power comes from”

“Here’s a hint – it doesn’t just magically appear because productivity increases”

Kimble has answered this best:

“Bargaining power does not have to increase to increase wages. It simply has to exist”

If bargaining power is UNCHANGED and productivity increases, then as long as bargaining power is not zero workers incomes will increase. We do NOT need an increase in bargaining power to increase income from productivity – you are muddling two mechanisms.

I have never debated that an increase in bargaining power increases wages – however, you seem to be treating it as the only mechanism, which it is not.

And I’m not attacking productivity growth, I’m attacking the notion that productivity growth automatically translates into higher wages without a mechanism and the fixation on the belief that productivity growth alone will grow wages.

I also didn’t say that Labour and Capital have to be perfect compliments just that you overstate their complementarity in order to gloss over my point concerning the growth/productivity relationship without addressing it.

I think the real issue is you are unwilling to address exactly where bargaining power comes from. Here’s a hint – it doesn’t just magically appear because productivity increases. If it did then wages would have risen more in the 90’s than they did in the last 8 years. They didn’t.

I suspect that much of the argument against us here Kimble presumes that the size of the pie does not change – a weird assumption given that productivity growth is by definition increasing the size of the pie 🙂

My explanation was clear and transparent – if you feel that I am mixing things up then potentially you have misunderstood what I am saying.

For example you said “productivity is a ratio” – by itself this statement was worthless, so I took the trouble of actually saying what the ratio was and how it worked.

In the second point you said that higher multifactor productivity does not imply higher output – however, if it happens exogenously it DOES, as it is a shift of the nations supply curve right. It increases output by definition – so your statement was simply, completely, wrong. I also covered that if we do a policy to increase “TFP”, then there is bound to be a trade-off – a trade-off that I will cover whenever National-Act release whatever poorly thought out “productivity policies” they have in mind.

Now to your recent claims. Labour and capital do not need to be “perfect complements” to have increasing returns to scale – they just need to be complementry. Saying that the extreme example does not hold in no way counter-acts the argument. Empirically there is an argument about whether constant or increasing returns actually hold in most countries – and as a result the assumption that one of these holds is not bold in any sense of the word.

Productivity is in every possible way strongly related to wage growth. Of course it is not the only factor that causes wage growth – as the share of the surplus that goes to labour also determines the level of wages. However, there is only so far “increasing the bargaining power of workers” can increase real wages.

If you increase productivity you are fundamentally making more with the same number of inputs – which fundamentally is the same as saying that real income is “higher”. Unless the policy causes a drastic, and I mean drastic, reduction in wage bargaining power then higher productivity will imply higher wages. As a result, it is pointless attacking a goal of “higher productivity” – the attack can only occur if the government says they are going to improve productivity in some way that has costs.

When I said productivity increased wages empirically I WAS talking about New Zealand. I work as an economist and I spend time analysing the household numbers. As I have said on Steve’s post over at the Standard I think it is fair that you guys want some evidence – however, I can’t pull out my work from work as that is there private capital. As a result, when I get a moment I will hunt around for some related evidence and try to make the case – I’ve actually got a few things I would like to test anyway so it could be fun 🙂 However, I will try to do this at some point, because the claim I am hearing from you guys that real wages and productivity are unrelated is not right – it is like saying output and income aren’t related.

“I would argue that productivity (or any other method of increasing profits) alone does not increase wages”

You are missing the point – as long as a worker has ANY bargaining power, any at all, even a tiny bit, higher productivity will increase wages. Bargaining theory would say that – as higher productivity implies that the production associated with the worker is higher.

“It’s in the interests of the right to reify the productivity=higher wages belief as it directs attention away from the real method of raising wages which is increasing bargaining power for workers.”

To anyone reading who is a bit unsure I would like to point out that this is completely wrong – you cannot increase peoples real wages forever through “bargaining power”, if the economy does not create more then people can not magically have more.

“there are plenty of examples – such as automation – that see capital inputs increase while labour inputs fall.”

And I could name about a billion things that have made worker productivity increase without reducing labour. So what?

Besides, you seem focussed on the small scale; a single production process. Automation did not lead to permanent mass unemployment. It just moved the labour from less productive activities to more productive ones.

“but bargaining power is not automatically increased with productivity either.”

Are you really trying to argue that wage increases from higher productivity can only happen when bargaining power also increases? Really?

Bargaining power does not have to increase to increase wages. It simply has to exist. Even if it fell by half it would still help productivity increases be captured by increased wages.

“it directs attention away from the real method of raising wages which is increasing bargaining power for workers.”

That may increase the share of the pie going to workers, but I doubt it does much to increase the size of the pie. In fact, it could actively retard pie growth, by making entrepreneurship less attractive.

But tell us, how can an increase in the bargaining power of the provider of one input of production lead to more being produced for less total resources?

It is in the interests of the Left to ignore or dismiss productivity as a method of wage increases, as the “plight of labour” is the source of their political power and feeds their delusion of moral superiority and intelligence.

Labour and capital can be complimentary but they are by no means a perfect compliment. You have presented this as too strong a relationship in order to justify your argument there are plenty of examples – such as automation – that see capital inputs increase while labour inputs fall.

You argue that productivity is strongly related to wage growth. I am assuming you are using developing nation examples for this because in New Zealand in the last 9 years we have seen record wage growth coupled with low(ish) productivity. In the decade before this we saw similar levels of productivity but real median wages fell.

I would argue that productivity (or any other method of increasing profits) alone does not increase wages. You allude to bargaining power as the method by which productivity gains become manifest as wage rises and you are right but bargaining power is not automatically increased with productivity either.

It’s in the interests of the right to reify the productivity=higher wages belief as it directs attention away from the real method of raising wages which is increasing bargaining power for workers.

Interesting – I am not sure that the employee gains from productivity are necessarily a constant though, 70% seems a bit high, maybe 😛