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Sep 02

Up wages to up demand to up productivity

Some say low productivity growth results in low GDP and wages growth – and productivity growth depends on new labour-saving inventions or new managemet practices that come along which allow companies to produce more output with fewer hours of work

But others question this – does low productivity cause low wages and growth, or vice versa? – it’s a ‘chicken and egg problem’

For example, J W Mason of the Roosevelt Institute, a think tank, argues that current ‘soft productivity growth’ (in the USA) is not due to some unlucky dearth of new innovations but rather a consequence of depressed demand for goods and services and a slack labour market that has depressed wages

He believes that, if the labour market were tighter and wages rising faster, it would induce companies to invest more heavily in new labour-saving innovations

This view overlaps with arguments made in a paper from the Hoover Institution and American Enterprise Institute which suggest the productivity drought has been caused by insufficient investment in capital equipment and software – but the good news is “it’s poised to rebound”

Marco Annunziata, chief economist of General Electric, argues that many of the technological innovations now coming to market, like 3D printing and the use of augmented reality glasses in industrial settings, really are generating huge productivity gains where they are deployed – however:

  • The investment that should be the most powerful in driving productivity for companies has been the weakest

  • This means that all these innovations are scaling – they’re only being implemented on an episodic basis, on a small scale

  • Companies are spending their capital budgets not on things that might cause a leap in their workers’ productivity, but on smaller projects to replace old machinery and software and make marginal efficiency gains

So what might change this?

Back to J W Mason: “If the labour market tightens and good workers are harder to find, and so wages rise, that will force companies to consider more of those big-ticket innovations that generate productivity growth”

For example:

  • A fast food shop might employ 10 people, each paid £10 an hour

  • The government then raises the minimum wage to £12 an hour

  • As a result, the shop owner might raise his prices, accept lower profits or close the place

  • Or he might invest in new machinery to replace some labour and so reduce overall labour costs – perhaps employing just five workers to meet current demand or six to meet expected growth in demand and profits needed

Thus higher productivity can enable faster economic growth and higher incomes for those who keep their jobs – and those higher incomes will generate even more demand for other goods and services and so further economic growth

Meanwhile, most of the unlucky people who lose their jobs will usually find alternatives, often better suited to their skills or needs – and they will help generate more growth there

Such logic is used to justify any increases in wages, whether or not due to market forces (labour shortages) or minimum wage legislation – but who would take the first brave move and offer a major wage rise to his employees so that demand for his specific products as well as all those offered by the overall economy might rise?

Henry Ford did exactly that back in the 30s, and it worked – but it’s a different world today

Indeed, nowadays, it takes a labour shortage or trade union threats of strikes, to coax much higher wages out of companies – and lucky wage earners only benefit in the short term for managers soon find ways to replace them when they become too expensive with more productive gear and methods

So what’s the best policy for wage levels?

According to J W Mason, some economists say ‘wages are low because robots are taking people’s jobs’ – others say ‘wages can’t rise because productivity growth is low’

‘Both can’t be true’

He concludes that: “Instead of worrying about robots taking away jobs, we should worry more about wages being too low for the robots to even get a chance”

P.S. Garry Kasparov, the ex world chess champion, has the last few words here:

“Romanticising the loss of jobs to technology is little better than complaining that antibiotics put too many gravediggers out of work”

 

 

 

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