Productivity increases should raise wages, not profits

One way to determine whether a business owner cares about worker welfare is to see how they adapt to productivity increases.

Let’s say you work for a company that produces and sells widgets. You produce 15 widgets an hour and make $15 an hour. You have a labour value of $1 per widget.

Now let’s say the company purchases some equipment to reduce the amount of time it takes for you to produce widgets, and you can now produce 30 widgets in an hour. This, of course, means that you can produce $30 worth of widgets in the same amount of time that it used to take you to produce $15 worth of widgets.

How the company responds to this new productivity increase determines how much they care about worker welfare.

For example, are they still paying you $15 an hour? If so, then you no longer have a labour value of $1 a widget. Now your labour value is 50¢ a widget. Your labour value got cut in half.

So, even though you’re producing twice as many widgets, you’re being paid half as much per widget.

If the company truly cares about worker welfare, they’d use productivity increases to increase worker wages. In this case, since you’re producing 30 widgets an hour and your labour value used to be $1 per widget, they could pay you $30 an hour.

If the company sells the widgets for $2 apiece, pays you $1 for your labour costs, and pays about 50¢ in other production costs, they make about 50¢ in profit, or about 25%. If they bring in their machinery and double production but keep wages the same (50¢ per widget instead of $1), then they’re making $1 in profit per widget, or about 50%. They doubled their profit per widget but your compensation per widget was cut in half.

Consider this image from the Economic Policy Institute.

Between 1948 and 1979, productivity increased by 108.1%, while compensation increased 93.2%. So wages and productivity increased at roughly the same rate, although not quite the same.

However, between 1979 and 2018, compensation rose by only 11.6%, even though productivity rose by 69.6%. Productivity grew 6 times as much as compensation did since 1979. That productivity would have allowed companies to generate more revenue.

If wages didn’t grow in step with productivity growth, where did that extra labour value go?

Well, according to the World Inequality Lab, at least “in the United States, the share of wealth owned by the top 1% adults grew from a historic low of below 22% in 1978, to almost 39% in 2014”.

As well, worldwide, average wealth per adult grew 1.9% between 1987 and 2017, while the wealth for the top 1% increased by 2.6%. The top 0.1% saw an increase of 3.5%, the wealth of the top 0.01% rose by 4.7%, that of the top 0.000005% grew by 5.3%, and for the top 0.000001%, it grew by 6.4%.

That’s more than triple what the average wealth per adult grew by.

So where did all that extra labour value go? Not to the worker. It went to the business owner.

Business owners have an innate desire to increase profit. As such, any increases to productivity will focus on increasing profit, not on increasing worker welfare.

Originally published at kimsiever.ca on 27 May 2020.