Saturday, September 02, 2006

Are Workers Real Incomes Falling?

A growing debate is in evidence in US economics Blogs on the apparent paradox of labour productivity going up and wages not growing in concert. With big guns from the economics profession blasting away, and from the other side of the Atlantic, I hesitate to dip into the controversy.

Ralph Martire, writes in the Chicago Sun-Times (2 Sept 2006), under the headline: “If economy is growing, why aren't workers' wages growing?”:

Meanwhile, the value of the national minimum wage has dropped to its lowest point in 50 years. Wages and salaries now constitute only 45 percent of the country's economy, a historic low. An additional 1.3 million Americans became uninsured last year as health-care costs continued to escalate at rates three times greater than wage growth.

In The Wealth of Nations, Adam Smith, the father of capitalism, maintained that what improves the lot of the working classes, who constitute the greatest proportion of society, ''can never be regarded as an inconvenience to the whole.'' He continued: ''It is but equity that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed and lodged.'' Maybe Labor Day celebrations
would be more festive if instead of being paid tribute, workers were actually being paid.”

Ignore the mantra about Smith being the ‘father of capitalism’ (what does this mean? Where does the notion come from?’). Smith’s sentiments were right.

Bear in mind that in his day in the mid-18th century politicians debated whether wages should be raised or left as low as possible because it wasn’t clear whether paying workers more would lead to what we call today a backward bending supply curve of labour (i.e., better paid workers would simply reduce their hours of work) or whether being hungry they would work harder and longer. People pontificated on the answer with all the arrogant confidence of total ignorance of what they were talking about. A more modern approach to such questions would be to test them empirically rather than float, what were in essence, personal prejudices.

In the passage quoted (WN I.viii.36: p 96) Smith (correctly in my view) rebuts the idea that ‘an improvement in the circumstances of the lower ranks of the people’ would be regarded as an ‘inconveniency’ to society.

How applicable his points were to a debate about the separation of national income into wages, profits, taxation (and re-distribution), and savings is another matter. Or for that matter the consumption of public goods and social goods like (in the UK) universal health and education provision, which are not minor considerations today. Labourers’ money wages in the 18th century were a smaller proportion of national income – there were not so many of them in an agricultural society (nearly 50 per cent of people were in this sector compared to under 3 per cent today).

The real test is to look at access to consumer goods of all kinds (and tastes) in the 21st century compared to the access of the population as a whole to consumer goods (a smaller set) that were available to people in, say, 1970, and various dates going back 200 years. The very existence of this medium used by Bloggers suggests that real wages are not falling.


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