David production wage8/15/2023 ![]() Any appeal to firms hiring more labour must take this into account.Īccounts of the productivity puzzle that focus on changing those capital-labour ratios tend to omit both the relative fixity of capital and the importance of demand side forces in influencing the hiring of labour. For the service sector, there may be scope for hiring more labour if the relative cost falls, but it is a fallacy of supply-side economics to expect that firms will hire more labour unless aggregate demand also increases. Firms cannot simply dispose of capital that they have invested in and switch to labour intensive methods of production without facing significant losses. But such adjustment is not necessarily feasible.įor the manufacturing sector, where large investments have been made in plant and machinery, hiring cheaper labour is far from straightforward. For example, it implies fairly rapid adjustment in capital-labour ratios – in other words, firms investing in people rather than building up cash on their balance sheet or buying new equipment. This argument presupposes certain things. One argument is that lower real wages have encouraged firms to hire more labour which has ultimately eroded productivity. Some others have linked lower real wages and lower productivity. In short, a high wage economy is a precondition for a return to sustainable prosperity. It would also help to sustain a recovery by underpinning higher levels of demand. A pay rise for hard-pressed British workers would mark a big step forward in raising productivity. ![]() It seems clear in this scenario that the key to resolving the productivity puzzle is to increase real wages. Recent headlines about a reversal in this trend are due to falling price inflation – partly a reflection of weak domestic and world demand – rather than to accelerating pay settlements.Īt the same time, rises in output have been matched by rises in hours worked workers in Britain have not been producing any more per hour. At least we can cling to the thought that the solution to this might offer a genuine recovery with sturdy roots.ĭespite falling unemployment levels, real wages have registered a continued period of decline never before witnessed in the past half-century. ![]() Low real wages, by eroding the incentive to work and the morale of workers, have fed low productivity. That the two phenomena have coincided is no accident. The other is the sluggish growth in productivity. One is the sluggish growth in real wages. Two things stand out about the economic recovery in Britain. The erosion of real wages has affected adversely the motivation and morale of workers thereby weakening productivity, argues David Spencer. Higher real wages would raise productivity and also induce the demand needed to absorb the extra output created by the rise in productivity. In short, a high wage economy is a precondition for a return to sustainable prosperity. ![]()
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