Tuesday, January 12, 2010

Productivity and Effects on Labor

If productivity increases because of new technology, will demand for labor fall?

I think it's complicated. If the market for a particular product is saturated, (e.g. there is plenty of supply of toasters to meet demand) then an increase in productivity will mean that fewer people will be necessary to maintain the current level of production. Demand for labor to produce that product will fall if productivity increases.

But consider a product that is useful and valuable, but that is too expensive to produce. Because of the high price most people use some substitute product that is cheaper. E.g. mobile phones during the 1980s. New technology that increases productivity for this kind of product will drive an increase in demand for labor to produce the product, as the market for the product grows.

Paul Rako discusses how increases in productivity cause the value of the output of each worker to increase, thereby supporting higher wages. I think he's kind of right, but that the mechanism isn't direct. The price of labor depends less on the value of the output of a particular job title at a particular business, and more on the value of output of labor altogether for the entire economy. To look at it another way ask your self the question: What is the difference between high wages and a low cost of living? If I work in a factory making widgets, and management brings in new machinery that enables me to make more widgets every hour, do I get a raise? Probably not, especially if the new equipment is just as easy to operate as was the old equipment. On the other hand, if my favorite auto manufacturer is making nicer cars for less money today than it was five years ago, that's value that has raised my standard of living even though my productivity may not have changed in five years.

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