Why Wages Rise: 2. Productivity

Dr. Harper is a member of the staff of the Foundation for Economic Education.

Editor’s Note: In the first article of this series (March 1956 issue) it was shown that unions have no perceptible influence on national wage rates, if we may judge from changes in union membership and wage rates over the last century. What, then, is the cause? This article begins the positive explanation.

An employee of General Motors is likely to wonder at times why his pay can’t be raised. “Even if it were doubled or trebled,” he may complain to his wife, “it would never be felt by GM.”

True enough. During 1955 the average pay of an employee of GM was $5,011. Yet GM’s profits for the year were $1,189,477,082 (or $3,751,477,082 before any ascertainable taxes) on a total business of $12,443,277,420. It can be seen at a glance that doubling the pay of this employee would be no more noticeable in the whole enterprise than would be the adding of another automobile to those now owned in the State of Michigan.

Doubling the pay of all GM employees, however, would be quite a different story. It would eat up in one year more than the total value of the firm’s real estate, plants, and equipment.

I am not concerned here with GM’s wage problem as such. I do not know whether their present wage scale is too low, too high, or just right. The only present purpose of these figures is to illustrate the difference between a narrow view and a broad view of the wage problem.

An automobile is the sum of many simple parts working together in simple ways. In like manner a complex economic problem is composed of simple elements which can best be seen by looking under the hood, so to speak.

In trying to see what makes wages rise, let’s consider first a lone pioneer instead of a single employee of GM. He is producing things entirely for his own use. What he produces—potatoes, etc. is his wage. He needs no Ph.D. in economics to know that he can consume only what he has produced, and no more. The only way he could double his wage would be to produce twice as much. He couldn’t raise his wage by as much as one per cent except by producing more. This is like saying that 1 = 1.

Now if a neighbor moves in, the two pioneers might trade with each other some of what each produces—let us say in equal amounts. The same rule would still hold true. Together they could consume only what they have produced. Or we might say that 1 + 1 = 2.

As the society increases, eventually reaching a laboring force of 63 million, the same would still be true.

Not all persons in a nation’s economy, of course, produce the same things. Nor do they produce the same amounts. Furthermore, some work alone and others work in groups as in a corporation. It has been estimated, for instance, that there are nine million different business enterprises or farms in the United States, and some eight million different commodity items or services in which they deal.

Estimates have even been attempted of the total amount of production for all these producers, added together in terms of dollars of presumed worth. For 1955 the total estimated figure was $322 billion. Goods and services were added together, roughly, on the basis of consumers’ appraisals of their worth in relation to one another. I can’t vouch for the accuracy of any such total figure. In fact, the task seems impossible for more than one reason. But even so, this much can be said about it: Whatever the right figure may have been, the only way to have doubled it as such (in stable dollars) would have been to have produced twice as much. There is no way by which arbitrary action or edict could have raised it by as much as one per cent, unless it had somehow increased production.

No more need be said about productivity and its importance in the question of what makes wages rise. The simple principle involved, for one person or for 63 million persons in an exchange economy is that consumption cannot be more than production.

Some want to know, however, whether the facts on wage rates square with this theory. Has the history of the United States borne this out?

Some estimates of the value of output per hour for the private sector of the national economy have been made available, giving us a basis for comparing productivity with wage rates since 1910. The relationship is close, except in a few instances.

From 1930 to 1933 real wages ran considerably ahead of productivity—or more accurately, wages continued their upward trend despite falling productivity. But a readjustment soon got under way, and the seemingly excess wage rate was completely corrected by 1941. On the other hand, wages seemed to fail to share fully the increases in productivity from 1916 to 1919, and again in the middle twenties.

If our theory is sound, one may wonder why any divergence at all between the two occurred. One reason might be errors in the data, of course. Another is that the two are not precisely different expressions of the same thing, as are “production” and “product wage” for a lone pioneer. Not all our national product goes for wage payments. Roughly, about two-thirds of it goes for wages and salaries, with the remainder divided about equally between (1) pay for current effort by those who are self employed, and (2) payment for the use of savings that have been invested in tools and equipment.
But the matter of dividing available goods and services into pay for current work as distinguished from pay for savings from past work is another subject, to be discussed subsequently. Present concern is with the relationship between wages and productivity. The correspondence is close, as it must be, because wages must come from production and can rise on a sustained basis only from increased productivity.

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By the Bootstraps

The rate of wages paid by employers is fixed automatically, and to all intents cannot be materially altered by any arbitrary action of either the employer or the employed. To many it will seem a paradox that neither the hard-fisted nor the philanthropic employer, neither the militant laborer nor the meek, has any material influence upon the average real wage paid and received. Or that strikes and lockouts are rarely of the slightest avail. Almost always an enormous loss. They may at times correct inequalities between different industries; but they can never affect the real wage for the country as a whole . . . .

In the long run, this [increased product per worker] is the sole way in which there can be any increase in wages in the country as a whole. It is easy to say that higher wages raise “buying power” and therefore increase consumption. But this is as absurd as to think one can lift one’s self by his boot straps. If wages were increased all around, this would, raise all costs of production, and so the price of everything that workingmen buy; there would be no increase in real wages . . . .

All this seems scarcely to need reiteration. Nevertheless, it is amazing to find that many believe that by some kind of hocus-pocus higher wages could be paid and consumption thereby increased.

Carl Snyder, Capitalism the Creator
The Macmillan Company, 1940

Read the next part of this series here