We all know that the wages and compensation individuals receive in private competitive markets reflects their productivity, unless pesky unions and government regulations get in the way -- because Economics 101 (and Michael Hlinka) have told us so.
Corporate CEOs are worth every penny their "independent compensation committees" award in compensation and stock options them because they are "creating value" and hedge fund operators are worth the billions they made helping the world learn about the impact of financial crises. Meanwhile, minimum wage workers, union members and public sector workers must all be overpaid because regulations, unions with their monopsony power, accommodating politicians and labour laws have all interfered with the magic of the market.
That's why politicians such Tim Hudak and his confreres want to contract out public services, restrict the powers of arbitrators and weaken labour laws.
The conviction that wages in private markets reflect their marginal productivity is usually just taken as a matter of ideological economic faith: there have been surprising few empirical studies done testing this. Efficiency economic theories actually suggest that wage structures are likely to be overly compressed.
A study just published by the Institute for the Study of Labor -- Are Occupations Paid What They Are Worth? -- that actually examines wages by occupation with productivity data using matched panel data from Belgium, finds the opposite. Instead, they found:
"a clear pattern of significant overpayment at the top ('Managers', 'Professionals'), and underpayment at the bottom of the occupational hierarchy ('Service and sales workers', 'Craft and related trades workers', 'Plant and machine operators', 'Elementary occupations')."
Armine has written recently about how even the IMF, Conference Board are now showing concern about the negative impacts of growing income inequality on a macro economic level. This study shows there's no justification for it on a micro-economic level either.
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This article was first posted on The Progressive Economics Forum.
The idea that workers' wages should be tied to their "productivity" makes no sense at all. The productivity of labour in modern capitalism depends very much on the degree of automation and mechanization of the enterprise, which typically is entirely within the purview of management.
To take a simple example, a secretary can produce far more (and more attractive) letters and documents using a computer and word processing/printing software than using a typewriter. Is the computerized secretary's labour worth more than that of the secretary using old-fashioned technology — and thus deserving of a higher wage? I think not.
Moreover, "value added" per employee per hour (one measure of an enterprise's productivity) is not entirely a function of the amount of labour-power supplied by the employee. Part of the value added in the process of production may represent the value of fixed capital - machinery and equipment - consumed or used up in the process, rather than the labour of the employee operating the machinery. And that proportion can vary.
Thus, in a highly-mechanized shoe factory, the aggregate value of the shoes that come off the production line in one day may have more to do with the value of the machinery than the value of the employees' labour. Conversely, in a less-mechanized, more labour-intensive shoe factory, the aggregate value of shoes produced over the same time period may embody more value from the employees' labour than from the equipment they use. Is there any sense in which there would be more economic justice in paying a higher wage to the former (more "productive") employees than to the latter (less "productive") ones?
Productivity is the "holy grail" of an economy. If the productivity of employees of a company increase the company can then lower the price of the product so the customer benefits, increase the salary of employees so employees benefit, and can receive increased profit so the owners benefit all at the same time.
If I produced two widgets per day and suddenly I was able to produce 3 widgets per day, all of the above could happen at the same time.
To answer your last question or your example of the secretary...yes. They have had to learn how to use the machine or the software. Once done they are a more productive and valuable employee. It may now take one secretary to do the work of two. The secretary who gets laid off can apply for work at the firm producing the machinery or software who are obviously be busy because their product works (productivity increases do not lead to less employment in the economy as a whole).
Nonsense. As I have demonstrated, productivity is something entirely external to the worker, and dependent on the amount and kind of investment the owner of the enterprise makes in the means of production. From a social justice point of view there is no reason why a worker "deserves" less of a wage because of choices and investment decisions made by his employer.
Wages are not determined by "productivity" in any event. Like every other commodity, the price of labour power is determined by the market. High unemployment keeps wages down for the employed; it has nothing to do with productivity.
And out here in the real world, only one of those things usually does happen - the increased profit. The other two things (reducing prices and paying workers more) operate to reduce profits, and the capitalist owner won't want to do that out of any sense of philanthropy.
In fact, the whole reason for the drive to increase productivity (what you call the "holy grail") is to increase profits. The problem for the capitalist is that increasing productivity means more investment in fixed capital relative to paying wages, and since labour is the source of his profit, his return on investment has a natural tendency to decline over time - what Marx called the tendency of the rate of profit to fall. The only way to combat this is to produce and sell more goods faster, until you run into competitive or natural limits and a resulting crisis of overproduction.
On the contrary, the increased productivity of the firm with the computers means it can get more work done with fewer employees. Productivity increases do in fact lead to unemployment; the advent of rapid technological change and automation of production in the last 50 years has resulted in more unemployment and underemployment, less job security, greater wealth for the owners of capital and greater impoverishment for the working classes.
You miss the boat.
Why do 90% of workers earn more than minimum wage? Because there is competition for them. Most minimum wage jobs are held by teenagers.
Why do companies spend money on courses and training for their employees? Because the company wants the employees to become more productive. Everyone wins when productivity increases.
Why are Canadians richer now than we were 20 years ago. And richer 20 years ago than we were 40 years ago. Productivity increases.
I happen to have a 2010 TD annual report. Profit $4,450,000,000. Salary and employee benefits $5,960,000,000. Yes, profit was less than salary and benefits.
Productivity increases lead to unemployment? Has there ever been more Canadians employed than now? There sure is substantially more Canadians employed now than 10, 20, 50 or 100 years ago. Productivity increases lead to new opportunities.
Please show me the Socialist paradise.
Right-wing economists like to promote the fantasy world where everyone prospers when capitalists prosper. How does the old slogan go? "What's good for General Motors is good for everyone".
250 years ago Adam Smith proposed that the Market coordinated people's activity in such a beneficent way as to lead one to think there was an Invisible Hand making sure the economy was fair and equitable to everyone.
In contrast to Smith's fairy tale of the Invisible Hand, economist Michael Perelman has talked about the "Invisible Handcuffs of Capitalism" in a book of the same title:
Instead of Adam Smith's imagined harmonious economy, the real world is one in which the interests of employers and workers are sharply at odds. Ideology may be able to partially cover up the nature of this conflict, but ideology cannot eradicate it. Instead, hidden from view, the conflict festers, poisoning all aspects of society. This corrosive aspect of capitalist social relations compels business and public agencies to take strong measures to impose their will on recalcitrant workers; however, the effort to control labor increases hostility within the workplace....
What we might call "invisible handcuffs" blind workers from realizing how capitalism both constrains their potential and degrades their quality of life.
The more technologically advanced an economy becomes, the more destructive the invisible handcuffs become. Both the economy and society suffer because of the tragic neglect of work, workers, and working conditions.
"Capitalism both constrains their potential and degrades their quality of life"
Compared to what economic system? Compared to utopia maybe. Did/Do citizens flourish in the Soviet Union, Korea, Cuba? Communist or socialist systems are characterized by one thing: death and imprisonment at the hand of the state. Tow the state line or you are branded an enemy.
Define fair and equitable. If I work twice as hard as you I should make twice as much as you. Anything else is unfair. The world is unfair. If I am twice as talented as you due to inherited traits and work as hard as you, I still expect to make twice as much as you. This may not be fair but trying to rectify this situation makes it worse. An economy needs its talanted (and untalented) citizens working to their maximum. Any disincentive (such as punitive marginal tax rates at upper income levels) to working at maximum is bad for an economy.
Greed is a human characteristic. The citizens of Cuba are no less greedy than the citizens of a capitalistic nation. The greed simply manifests itself in different ways.
Using productivity as a measure of how "hard" someone works is phony. If you are a worker operating a computerized machine you can be highly productive without working nearly as hard as another worker who is doing the same job with less sophisticated tools. If hard work were the criterion for how much people got paid, coal miners would make more money than business executives.
Dragging "greed" into this is irrelevant and pointless, and only goes to demonstrate that you don't have a clue what you are talking about.
Sorry, "If I work twice as hard as you" and as a result my output is twice as much as you, if I am not earning twice as much as you I am being treated unfairly.
Productivity has nothing to do with how hard someone works. Productivity is concerned only with output. If I can increase my output given the same inputs productivity increases and everyone wins. Working harder may be a component of my increased output but it is output that is ultimately measured.
Please define fair and equitable.
Workers aren't paid according to their "output", unless they are paid by piecework.
The products of their labour do not belong to them to sell to the highest bidder, but they belong to their employer. The employer pays the worker a wage or a salary based on the amount of time the employee applies his labour power to producing "output". Whatever results from that is the property of the employer, and the source of his profits. That's why employers try to increase productivity, and thus "output", by automating and mechanizing production. When they succeed, they don't generally share the increased profits with their employees
Nor are workers paid according to how "hard" they work (whatever that means). Some of the hardest working people are paid the lowest wages.
You clearly have no familiarity with the world of working people, and I have no desire to try to educate you any further.
Employees who are very good at what they do entertain offers from other firms all the time. Their reputation.expands as time goes by. Employees who are good entertain fewer offers but get offers non the less. Good employees are always in demand and it is up to the employer to retain them. This happens all the time.
Nobody cares how hard someone works. All they care about is the output. This is the second time I've agreed with you but you don't seem to accept it. Workers (all workers) are paid according to their output (unless they are in a union and then it is a race to the bottom as their is no incentive to be better at what you do. (Think teachers union. If my output is twice yours (better marks for my students...more efficient teaching methods compared to you...happier and smarter students compared to your students)...I get no reward. Eventually I say "to hell with the extra effort" and my effort drops to the norm.
No familiarity with working people? I work...do you?