Productivity and wages: was Marx right?

Why have real wages stagnated for the poorest Americans? Why do so many young people want to work in "creative" industries such as journalism, music and acting? Could Marx be proved right in his forecast that productivity growth would eventually reduce wages?
A fascinating paper by Gilles Saint-Paul in the latest Economic Journal (early version here) sheds light on these questions - and suggests Marx might be right.
The key feature of his model is bounded utility - the notion that our needs are limited, and indeed satisfied. When this is the case, productivity growth reduces wages, in two ways.
First, if our needs for a good are satisfied, we won't buy much more of it as prices fall. The upshot is that rising output per worker will lead to fewer workers - as has happened in agriculture.
Second, if we live in a world of abundance, we'll become less sensitive to higher prices, because higher prices don't much reduce our ability to buy other things we need; think of footballers' wives buying high-margin designer clothes. As price-insensitivity rises, so does monopoly power. So firms' mark-ups over wages rise and real wages fall.
In such a world, Marx will be right. Maybe this explains why real wages for the poorest American workers have stagnated for years.
Which raises the question. Why has productivity growth, generally speaking, led to higher real wages over time?
The key, says Saint-Paul, lies in distinguishing two types of productivity growth - the ability to produce existing goods more efficiently, and the ability to produce entirely new goods.
It's new products that cause rising real wages. These create new needs - hence raising demand for labour - and create competition for existing ones, thus limiting the rise in margins and raising real wages.
Hence the increased desire to work in creative occupations. The wisdom of crowds knows that its in these that productivity growth will lead to a higher demand for workers. In existing  producing industries, real wages will fall with productivity.
Without this increased variety of goods, Marx could be right.
Which raises the question. Is increased product variety and innovation an integral part of capitalism - in which case Marx will be wrong forever - or has capitalism just enjoyed 200 years of good luck in discovering new products?

Comments

[claus vistesen]

Hi Chris,

Very, very interesting topic.

I have also posted on it, in a US context. and you might want to check out my sources ...

http://clausvistesen.squarespace.com/alphasources-blog/2006/3/20/productivity-growth-and-income-inequality-in-usa-a-sad-correlation.html

Your perspective is a bit different and also very important but still the main theme is the same I guess.

[Paul Ralley]

Was Marx right or have we got lucky?

Very interesting post Chris, I think the key here is the new products and services people choose to buy. There may well be a limit to demands, but we can only be a small percentage of the way there.

I think the limit to demand will come only when most people in the world have a standard of living equal to that enjoyed by middle income westerners. That leaves a hell of a lot of demand to be filled. Mobile phones are among the best selling consumer goods, but there are at least 4 billion customers.

As for UK growth? We seem to be 10 years behind the US or so, so there may well be demand for more therapy, bigger cars, air conditioning at home....

US growth, potentially that is near its peak, but there too there are 150 million customers below average.

So even with no new services (which seems unlikely) there is a lot of demand.

The question is what happens when all global demand is satisfied? Stagnation may result, but global incomes will be at such a level that there will be effectivly zero absolute poverty, universal eduction and healthcare, tiny infant mortality and average life spans in excess of 80 years.

This seems a lauerdable and acheiveable goal.

[Luis Enrique]

"The key, says Saint-Paul, lies in distinguishing two types of productivity growth - the ability to produce existing goods more efficiently, and the ability to produce entirely new goods.
It's new products that cause rising real wages."

When the new products that we start to produce are therapy and video games, how well is that captured by productivity statistics and real wage calculations?

I also wonder what impact a trend towards less efficient but more environmentally friendly means of production might have on real wages. But I guess that'd be a very small effect.

[Luis Enrique]

"As price-insensitivity rises, so does monopoly power. So firms' mark-ups over wages rise and real wages fall."

Does it matter that the people who are paid to make those luxury goods aren't necessarily the same people as are buying them? I mean rich people (high real wage) paying over the odds for luxury goods is a funny cause of lower/flat real wages for society's poorest, who by definition ain't buying those marked-up Gucci handbags. What matters for the real wages of the poorest is the pricing of non-luxury goods, no? If the poorest people (in the world of abundance) do start buying Gucci (or Burberry) presumably that's the sign that their real wages have risen, in which case what of the flat real wages we're supposed to be explaining? Is this argument coherent? Or have I utterly misunderstood because we're talking about averages.

[dearieme]

"Why have real wages stagnated for the poorest Americans?" Because of a steady stream of unskilled immigrants who have perpetually put downward pressure on the wages of unskilled labour?

[phil jones]

I wonder if, as we move up some kind of "hierarchy of needs" to look for self-actualizing products, these are actually better provided by commons-based peer-production rather than traditional exchange markets.

The more "luxury" a brand is, essentially the more its value is derived from social practice and perception and meaning than any scarce material. Social practice and meaning is increasingly being well articulated in, say, the blogosphere. (Look at a blog like Gaping Void for an example of the transition : a synthesis of free artworks and culture interwoven with a world of high-priced luxury items.)

Creatives (who are those inventing new products and needs) have always lived in a mix of commerce and cultural gifting. Now that the internet lets them work virtually, away from high publishing and distribution costs, it may be that increasingly, the new services created, won't be available within the market but within the "peerosphere". The market shrinks as a proportion of what matters to humans, and naturally wages fall. But other kinds of currencies (attention, reputation, connections) become more important.

[Maynard Handley]

"
As for UK growth? We seem to be 10 years behind the US or so, so there may well be demand for more therapy, bigger cars, air conditioning at home....
"

Given the British lack of interest in decent plumbing (in particular faucets controlled by a single lever that swivels from cold to hot rather than two separate hot and cold taps) I wouldn't hold my breath. The British lack of interest in the minor things that make a house more pleasant to live in mystifies me, but does appear to be a real phenomenon.

[Will Williams]

I've never heard an American criticise mixer taps before. Same thing as you guys use on showers, y'know?!

And don't forget, Maynard, Brits don't have a plunger, and a dutiful family member, in every home to shift debris that didn't make it thru 2x180 degree turns you guys have on the way to the sewer pipe.

But Air would good, no doubt about that.

[Robert Schwartz]

Dearie has it right. The US has 11 million illegal immigrants and, over the last 20 years, about 15 million legal immigrants.

[angry economist]

I would think the US wage and productivity peformance in production industries is a bit more complicated than suggested in your article.

Generally increases in manufacturing productivity in developed nations has been more due to capital investment than investment in labour skills. Labour productivity might still look higher and higher in terms of output per worker, but the fact is that this is augmented by more productive capital rather than investment in skills.

Much US manufacturing might be characterised as low skill / high capital - it might - I dunno - would need to look into this more.

Plus there is the very good point about immigrant labour keeping down labour costs. If it is low skill manufacturing real wages that have fallen - then this is also happening in a relatively loose labour market with low barriers to entry, and low skill requirements.

In a loose labour market the incentive or need for employers to pass on the profits from productivity gains to employees is also vastly reduced.