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Wages Are Based More on Productivity, Less on Exploitation

2 21 0
02.01.2020

Ranking high on the productivity scale, like it or not.

Photographer: Michael Short/Bloomberg

Photographer: Michael Short/Bloomberg

“Workers are delivering more, and they’re getting a lot less,” argued former Vice President Joe Biden in a speech at the Brookings Institution this summer. “There’s no correlation now between productivity and wages.”

Senator Elizabeth Warren, a Democratic presidential rival, agrees. Her campaign website states that “wages have largely stagnated,” even though “worker productivity has risen steadily.”

The claim that productivity no longer drives wages is common enough on both the political left as well as the right. Proponents of this view argue that workers aren’t getting what they deserve based on their contributions to employers’ bottom lines.

Income inequality — the gap between the incomes of the rich and everyone else — supposedly demonstrates that the economy’s rewards are flowing, undeservedly, to those at the top. Populists take that conclusion even further, arguing that capitalism is fundamentally broken.

If that is what’s happening, it refutes textbook economics, which argues that wages are determined by productivity — by the amount of revenue workers generate for their employers. If a company paid a worker less than her productivity suggests she should be making, then she would go down the street and get a job that would pay her what she’s worth. Employers compete for workers, ensuring that workers’ wages are in line with their productivity.

This theory leaves out a lot, of course. Pay and productivity can diverge for any number of reasons not included in the........

© Bloomberg