RALEIGH — If you’re concerned about the plight of working families in North Carolina and the rest of the country, then you ought to be greatly concerned with increasing the annual rate of growth in labor productivity.
Huh? If folks aren’t making enough to make ends meet, shouldn’t the government pass a law or something?
Shocking as it may sound to you, my answer to that question is no. Labor markets aren’t instruments of manipulation. They aren’t designed to oppress the huddled masses. The demand for and compensation offered a worker are important signals about how much the worker’s skills, talents, and efforts contribute to satisfying someone else’s need for goods or services. If the worker receives low pay, passing a law to compel his employer to pay a higher wage doesn’t change the underlying economic reality. Perhaps the worker will receive the higher, compelled wage. But it is also possible that the worker’s apparent wage gain will be attenuated by inflation, or worse that he will be displaced by a piece of equipment or a foreign worker willing to work for less outside the jurisdiction of the regulator. Whatever the outcome, the mandate to pay a higher wage will not change the value of the worker’s output, as ultimately assessed by consumers.
As usual, economist and National Center for Policy Analysis scholar Bruce Bartlett has been paying attention to important economic trends while other analysts were distracted by irrelevancies and political blather. In a new piece, he summarizes the findings of a recent report from the Federal Reserve Bank of Dallas that examines growth in productivity — in output per unit of labor. Historically, productivity in the U.S. has grown by about 2.3 percent annually. Americans are about 25 times more productive than when their forefathers and mothers declared independence from the British crown in 1776.
In 1973, for reasons that apparently remain mysterious, productivity stopped growing as rapidly. The rate averaged only 1.5 percent through the mid-1990s. It was no coincidence that real compensation, particularly at the lower end of the income distribution, slowed down its rate of growth at about the same time. Now, since 1995, productivity has been on a major upsurge, shooting up by an average of 3.2 percent a year. No doubt powered by the Internet revolution, among other factors, productivity growth promises to improve the standard of living for millions of Americans without recourse to counterproductive government regulations or grandiose spending plans.
Bartlett’s full column is well worth reading. The key point to remember is this: if the goal is raising the real compensation of American workers — not just their apparent compensation, which can certainly be accomplished by government mandates and inflation — then the average hour of work they perform needs to become more productive. That could require formal education, but it is at least as likely to require on-the-job training and investment in new plants and equipment.
Yes, this means that reducing the cost of investing in physicial or human capital — say, by ultra-evil tax cuts for corporate income or capital gains — tend to boost the economic fortunes of most workers. The old Marxist assumption that capital and labor are at odds in a capitalist economy was plausible only to those, including Karl Marx, exhibiting a pathetic and debilitating ignorance of how economies actually work.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.