Productivity Hold Wages Down? Right on the Marx!?

Tim Worstall's column at TCS on productivity, economic growth, and wage growth is a very good read, and I would say that his reasoning seems generally solid. The argument in a nutshell is that increased productivity allows companies to produce more output, to match the demand of a growing economy, without hiring more workers. No increase in the demand for labor, and so no increase the in price of labor, i.e. wages. Sounds fairly convincing, as far as it goes.

But it seems to me that there is a subtlety missing from this discussion (or possibly I am just missing it, and it’s merely a personal problem). Is it really true that economic growth must exceed productivity growth in order for wages to rise, as some ironclad rule? Shouldn’t it depend, at least partly, on the underlying nature of productivity growth? I believe that productivity growth can come from (at least) two main sources: improvements in physical capital and/or improvements in human capital. That is, productivity growth might represent a return on capital investment by the businesses themselves, such as better, more efficient widget manufacturing equipment, or improved software for managing the widget production line, etc. Or the increased productivity can come from the workers doing their jobs more efficiently and effectively, working “smarter” with higher skills that add more value (produce more widgets) per hour worked.

If productivity growth is entirely of the first kind (investments in non-human capital) then, yes, we might well expect to see everything unfolding exactly as Worstall observes. Corporate profits go up, as those who put up the money (business owners, public or private) reap the benefits of the investments they made. But productivity growth of the second kind, where workers get more productive based on improvements in their knowledge and skill sets, should—or at least could, in principle—result in higher wages. You produce more, you earn more.

Now, does the current scenario of high productivity growth without wage growth mean that, necessarily, productivity is coming from capital investments as opposed to workforce improvement? Can data be used to support or refute this hypothesis? What if at least some of the productivity growth comes from a better-skilled workforce? Then, would not their static wages indicate that they’re producing more, yet getting screwed out of the greater pay they’ve “earned”? There’s something rather Marxist in that scenario… a capitalist owner class “exploiting” the labor of working class without “fairly” compensating them, because they monopolize the job market through controlling the means of production, and keeping workers in competition with one another for the limited supply of jobs. I put “exploiting” and “fairly” in scare quotes to make sure that I am not mistaken for a Marxist myself. But just because Marx was wrong about the big picture doesn’t mean he was wrong about everything. There’s more than a hint of Marx in the first scenario as well, by the way. If the benefits of productivity growth accrue exclusively to those with money to invest in large capital improvements, then the “lowly worker” is similarly screwed.

If economic growth continues to accrue overwhelmingly at the top, making the rich ever more extravagantly richer, then we may well see good old-fashioned class resentment continue to rise along with it… Not that that’s a good thing! I’m just saying…