When you ask the average person why wages are so much higher today than the were 100 years ago, or why they are so much higher in developed countries than in developing ones, marginal product of labor is woefully neglected, and unions, regulations, and society’s general beneficence are woefully exaggerated.
Some people think that the subtler truth is that unions have had more of a positive impact on wages than the average economically literate person, and economists in general, believes. Thus despite marginal product of labor being the massively unsung hero of the story with respect to what the average person thinks, they feel it necessary to emphasize the larger role they think their minor hero deserves. But when you’re offering a quote to a journalist, or writing for public consumption, you educate readers far more if you emphasize the role of marginal product.
This is why, despite being unable to answer the question “who am I to lecture David Autor?”, I have to say he is negligent in his duties in what he appears to have said to this New York Times article about rising Chinese wages:
“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.”
“But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”
Here it is consumers’ generous willingness to bear higher prices that is the hero. But is the story of economic development really one of consumers bearing higher prices which allows wages to rise? Or is it about increased marginal productivity of labor that generates higher wages for workers without necessarily leading to higher consumer prices whatsoever?
The way capitalism is supposed to work is not consumer generosity leading to higher wages, but instead more productivity doing so. After all, consumers can’t tolerate higher prices for everything they buy without buying less of some things, which means some laborer somewhere producing less.
Marginal product of labor, not consumer beneficence, is the hero of this story.
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Tuesday ~ February 21st, 2012 at 1:16 am
Lord
I think you are misinterpreting what he means by bear the consequences and what he means is the refusal to pay any higher prices than they need to, leading to jobs there and loss of those jobs here. I would say better jobs here but that is not what it has led to.
Tuesday ~ February 21st, 2012 at 2:20 am
nemi
The reason we are richer is, mainly, technological development.
The reason that these gains, during some periods, is more qually shared is to a large extent because of those “minor heroes”.
Tuesday ~ February 21st, 2012 at 6:32 am
foosion
Higher marginal product of labor is clearly very important, but is not enough. There has been a large rise in productivity over the past 20 or more years without a corresponding rise in median wages in the US – capital is grabbing a larger share of the pie. This appears to be due to labor’s decreased bargaining power, including due to declining union power, exchange rate policy, etc., etc.
Tuesday ~ February 21st, 2012 at 9:35 am
david
Labor can be more productive without actual individual laborers being the agency capable of demanding the increased returns to productivity; the extreme of this logic is of course slavery. Investment in the slave accrues returns to the master, not the slave, if the master so extracts a sufficiently large lump-sum tax.
Tuesday ~ February 21st, 2012 at 9:54 am
BSEconomist
You should everywhere replace “marginal product” with “productivity”, but otherwise good post. I like to make the same point with people in a different way–I tell them that technology destroys jobs and this is what makes nations rich. The argument flows through the same channel as your post; rising productivity means that fewer people are needed to produce the same amount, which frees up labor to do something else.
It is important though to understand the weakness of this sort of argument. It is not the case that everyone is better off. In fact, I framed the point in a way to emphasize the problem, I.e. that someone lost their job to rising productivity–this is the basic story of US manufacturing for the last 30 years. Acknowledging this fact, like Autor, is more than fair. If we want to pay ever lower prices, and we should, then we have to recognize that someone will have to loose their job. For me this is why we ought to be aggressively retraining workers replaced by technology and trade.
Tuesday ~ February 21st, 2012 at 12:04 pm
RickR
Suppose there were a time, 150 years or so ago, when important commodities, say, sugar or cotton, could be produced more cheaply using slave labor. Could we (placing ourselves back then), should we, impose a cost on society – i.e., higher costs for sugar and cotton – to eliminate slavery? Are there social structures that are collectively worth paying for and social structures that are collectively worth the cost of getting rid of?
Perhaps as economic actors we don’t need to worry ourselves about things like this, but as human beings we should.
Perhaps as human beings – rather than as merely economic actors – a few more dollars for a smart phone is worth the societal and moral goods that those few more dollars are buying.
I would argue this is not “consumer beneficence”, but rather a cost we are electing to pay for real – if perhaps non-economic – goods.
The cited NYT article itself notes (the last four paragraphs) that already labor costs are rising for Foxconn and Foxconn is already “announced plans to invest in millions of robots and automate aspects of production”. So pressuring Foxconn to raise wages will, while it will raise prices for their goods in the short term, will accelerate the investment in production facilities raising the productivity. Thus, if marginal product of labor is the hero of this story, then we may be just speeding the process along.
Tuesday ~ February 21st, 2012 at 2:27 pm
bdbd
I”m reminded of Brad Delong’s brief finger exercise on North American slavery and consumer surplus: http://delong.typepad.com/113_F07/20070910_cuibono.pdf
Wednesday ~ February 22nd, 2012 at 12:01 am
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