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Productivity, wages and jobs — more economic stupidity from the media, part I
Gerard Jackson
In Wage cuts won’t boost jobs (The Age, 20 June 2006) Tim Colebatch wrote as if he was on amphetamines. Now Tim, who must rank as one of the country’s worst economic commentators, has the bizarre belief that the demand for labour is completely unrelated to the cost of labour. He claims that OECD findings and the work Fred Gruen support his economic illiteracy.
However, rather than deal immediately with Colebatch’s economic stupidity (I’ll do that in part II) let me take the reader on a little trip to Mr Colebatch’s fantasy land where economics is an ideology and economic laws a fraud. This, I hope, will help set the framework for my second article in which I shall once again expose his staggering ignorance of basic economic principles.
It is August 1998 and Colebatch seems to think, as he still does, that Professor Bob Gregory from the ANU (Australian National University) has demonstrated that rising productivity was the cause of our then atrocious level of unemployment. Describing Gregory as “an old-style economist,”— evidently not realising that “old-style” economists would have rightly ridiculed Gregory’s views.
Colebatch tells us Gregory found that “faster productivity growth has been associated with lower employment growth”. Therefore, according to the this brilliant professor, this statistical association proved that rising productivity means fewer jobs, or so Colebatch claimed. This is known as the fallacy of post hoc, ergo propter hoc, arguing from false causes.
He then referred to Professor Dowrick, also from the ANU, who concluded that the accord-imposed wage restraint of the 1980s brought about rapid employment growth, which in turn caused labour productivity to grow slowly. This clearly demonstrates the trade-off between productivity and employment. Less productivity, more jobs and vice versa. (This is the kind of shoddy thinking that gave us the now discredited Philips curve.)
The insinuation that lower’ productivity means less output per head is an abuse of statistics as well as economics. His argument that wage restraint lowered unemployment during the 1980s is on par with his comments on employment and productivity. Strictly speaking, what lowered unemployment was the Labour government's inflationary policy of letting the money supply explode.
These great minds also directed their attention to New Zealand where the rise in employment was accompanied by falling productivity. Professor Brian Easton suggested that “allowing employers to pay less” then the previous awards demand may have caused them to take more unskilled labour at low wages which then depressed labour productivity.
This brought Colebatch to a study by the Australian Bureau of Statistics which found that in 1993 50 per cent of workers who lost their jobs in the previous three years were left unemployed, specially the low-skilled. The implication for employment of raising productivity is clear. That the real reason for these workers’ plight was the over-pricing of labour did not seem to enter Colebatch’s addled head — but then little ever does.
Now the Austrians, being market economists, have never argued that rising productivity raises the demand for labour. These economists correctly point out that so long as there is sufficient land capital available to employ people the phenomenon of mass unemployment cannot persist in a free market. It follows that full employment (defined as jobs for those able and willing to work) can be maintained even where a society is consuming its capital, i.e., regressing. But if what one means by a rising demand for labour a general increase in real wages, then this can only be achieved by raising investment per worker.
In other words, rising productivity increases the intensity of the demand for labour which is just another way of saying that it raises real wage rates. According to this theory wage rates should move in tandem with productivity. As Paul Krugman noted:
History offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. (Pop Internationalism, The MIT Press, 1997).
Since the industrial revolution the advancing world has experienced a long-term trend in productivity market by an astonishing increase in living standards. But if Colebatch and his ideological playmates are right this productivity trend should have been accompanied by rising unemployment, leaving one amazed that there is any employment at all these days.
The Austrian school of economics puts it this way: capital consists of a heterogeneous structure made up of complex stages of production. The addition of more complex stages raises the marginal productivity of labour and hence real wage rates. Should the structure shrink or the population outstrip capital accumulation real wages will fall, as will productivity. But so long as labour costs are free to adjust to market conditions large-scale unemployment will not emerge.
It should now be obvious that any attempts to resist a downward movement in real wages in these circumstances would only cause rising unemployment. (I fear I have done some violence to production structure analysis. Nevertheless, its basic principle remains intact.) In severely hampered labour markets part of a union-created labour surplus could also be employed in suboptimal occupations on a part-time or casual basis; even a rise in self-employment might in part be a reflection of this sad state of affairs.
Fortunately history provides us with a graphic example of the relationship between land, capital and wages. England’s population stood at about 4.8 million in 1348; by 1377 visitations by the Black Death had slashed this figure by around 2 million. The result saw a rapid and significant rise in peasant wages and living standards. Cutting the population by nearly 40 per cent was like increasing the amount of fertile land by a similar amount. The gradual rise in population eventually caused real wages to fall again. (It was not until 1600 that the population of England and Wales reached 5 million.)
This historical example illustrates the free-market economist’s argument that while the volume of employment is not determined by productivity real wages are. As these professors should know, factors of production, including labour, are faced with descending arrays of marginal productivities. Reducing the quantity of any factor therefore raises its price by pushing it up the productivity curve, i.e., the supply curve now intersects the demand curve at a higher point.
We can now see that a similar effect can be created for labour (that is labour that remains employed) by raising real wages (wages here means gross wages, which includes oncosts) above their market clearing levels. *This creates the desired effect by artificially reducing the labour supply by generating unemployment. (At least this is more humane than germ warfare.) Of course, if, for some reason, labour costs were allowed to once again adjust to market reality productivity could fall as labour moved into less productive employment. But this is just another way of saying that the point of operating at the margin had been lowered.
It should also be noted that though average productivity might fall total output will rise as will payrolls. (This, however, is not to suggest incomes would be at an optimum.)
As I pointed out earlier, what raises productivity is investment. Claiming that expanding employment lowers productivity is incredibly perverse. Changes in productivity per worker are basically determined by the capital-labour ratio. Moreover, raising productivity by creating unemployment is only achieved by destroying marginal operations.
The effect of this is to lower total output which transfers income from those who lost their jobs to those who got to keep theirs. A fact that the likes of Colebatch overlook — or should I say ignore. With the capital structure unchanged, all that happens is that additional labour tends to be absorbed into more labour intensive lines of production, the real wages of which can only be raised by additional investment. The statistical effect of more labour intensive jobs emerging is to lower average productivity.
On the other hand, if the rate of capital accumulation exceeded the rate at which the labour supply grows productivity and real wages will rise in tandem. In this kind of situation a general labour shortage could emerge with the lucky country having to import ‘guest workers’ to fill its job vacancies thus raising per capita incomes. In any case, which ever way we look at it the only sensible measure of productivity is one that measures output per worker in labour markets that are allowed to clear.
Easton’s suggestion that paying less lowered productivity because employers would now hire inefficient workers is utterly absurd. What matters to an employer, as Easton should know, is the value of his product in relation to the cost of hiring him. He is not going to take on cheaper workers if they are going to reduce the value of his output.
No employer could act as Easton suggests and stay in business for long, not if he is operating in a free market. Such an employer would be deliberately ignoring price signals. Better to hire someone who costs twice as much as another worker if the value of his output is more than double. And this is what employers do.
I consider the approach of this a trio of left-wing ideologues to be mischievous and a desperate attempt to rationalise their opposition to free labour markets while, albeit indirectly, excusing the job-destroying activities of trade unions. Unfortunately their ideology makes them popular with journalists who are more concerned with attacking free markets, specially in labour, than they are with properly informing their readers.
Therefore if past performance is anything to go by, the argument I have outlined here is not going to be found in The Age, or any other Australian newspaper or print magazine.
Perhaps the intellectual scandal is that Australia’s self-appointed defenders of the market allow the likes of Colebatch to get away with their destructive nonsense.
*One can imagine the howls of outrage from left-wing economists if businesses combined to create a permanent pool of unemployed in the hope it would drive down wages.
Productivity, wages and jobs — more economic stupidity from the media, part II
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 10 July 2006