Chapter 10 - Productivity and Pay

People are a key part of the inputs which produce output.
Most people do not volunteer their labor free of charge, so they must be either paid to work or forced to work, since the work has to be done in any case, if we are to live at all, much less enjoy the various amenities that go into our modern standard of living.
From the standpoint of the economy as a whole, payment for work is a way of allocating scarce resources which have alternative uses.
Workers would obviously like to get the highest pay possible and employers would like to pay the least possible.

Productivity:

While the term “productivity” may be used to describe an employee’s contribution to a company’s earnings, this word is often also defined inconsistently in other ways.
A worker using the latest modern equipment can obviously produce more output per hour than the very same worker employed in another firm whose equipment is not quite as up-to-date or whose management does not have production organized as efficiently.
The productivity of any input in the production process depends on the quantity and quality of other inputs, as well as its own.
The same principle applies outside what we normally think of as economic activities, and it applies to what we normally think of as a purely individual feat, such as a baseball player hitting a home run.
Whatever the source of a given individual’s productivity, that productivity determines the upper limit of how far an employer will go in bidding for that person’s services.
Just as any worker’s value can be enhanced by complementary factors—whether fellow workers, machinery, or more efficient management—so the worker’s value can also be reduced by other factors over which the individual worker has no control.
In countries with high levels of corruption, the bribes necessary to get bureaucrats to permit the business to operate likewise have to be deducted from sales revenues and likewise reduce the value of the product and of the workers who produce it, even if these workers have the same output per hour as workers in more modern and less corrupt economies as workers in more modern and less corrupt economies.
More generally, in almost any occupation, your productivity depends not only on your own work but also on cooperating factors, such as the quality of the equipment, management and other workers around you.
To say that the demand for labor is based on the value of the worker’s productivity is not to say that pay is based on merit.

Pay Differences:

Wages and salaries serve the same economic function as other prices that is, they guide the utilization of scarce resources which have alternative uses, so that each resource gets used where it is most valued.
Income Distribution:
- Some people are simply older than others, for example, and their additional years have given them opportunities to acquire more experience, skills, formal education and on-the-job-training—all of which allow them to do a given job more efficiently or to take on more complicated jobs that would be overwhelming for a beginner or for someone with only limited experience or training.
- No matter how much income passes through your hands in a given year, your wealth depends on how much you have retained and accumulated over the years.
- Although there is much talk about “income distribution,” most income is of course not distributed at all, in the sense in which newspapers or Social Security checks are distributed from some central place.
- In a market economy, those who get the direct benefit of an individual’s goods or services decide how much they are prepared to pay for what they receive.
- Not only do the numbers of people differ considerably between low- income households and high-income households, the proportions of people who work also differ by very substantial amounts between these households.
- The main reason for the more rapid rate of household formation is the increased tendency, particularly among unrelated individuals, to maintain their own homes or apartments rather than live with relatives or move into existing households as roomers, lodgers, and so forth.
Trends over time:
- Radically different trends are found when looking at statistics based on comparisons of top and bottom income brackets over time, rather than following individual income-earners over the same span of time.
- Whatever the relationship between one income bracket and another, that is not necessarily the relationship between people, because people are moving from one bracket to another as time goes on.
- Many people who never have a spike in income that would put them in the top one percent may nevertheless end up in the top 20 percent after many years of moving up in the course of a career.
- Just as there are spikes in income from time to time, so there are troughs in income in particular years.
- Many people who are genuinely affluent, or even rich, can have business losses or off years in their professions or investments, so that their income in a given year may be very low or even negative, without their being poor in any meaningful sense.
- The fundamental confusion that makes income bracket data and individual income data seem mutually contradictory is the implicit assumption that people in particular income brackets at a given time are an enduring “class” at that level.
- The higher up the income scale people are, the more volatile are their incomes.
Differences in Skills:
- Among the many reasons for differences in productivity and pay is that some people have more skills than others.
- Although workers may be thought of as people who simply supply labor, what most people supply is not just their ability to engage in physical exertions, but also their ability to apply mental proficiency to their tasks.
- In those times and places where physical strength and stamina have been the principal work requirements, productivity and pay have tended to reach their peak in the youthful prime of life, with middle-aged laborers receiving less pay or less frequent employment, or both.
- The rising importance of skills and experience relative to physical strength has changed the relative productivities of youth compared to age, and of women compared to men.
- Meanwhile, the dwindling importance of physical strength also reduced or eliminated the premium for male workers in an ever-widening range of occupations.
- A simultaneous rise in rewards for work and a growing welfare state that allows more people to live without working virtually guarantees increasing inequality in earnings and incomes, when many of the welfare state benefits are received in kind rather than in money, such as subsidized housing or subsidized medical care, since these benefits are not counted in income statistics.
Job Discrimination:
- While pay differences often reflect differences in skills, experience, or willingness to do hard or dangerous work, these differences may also reflect discrimination against particular segments of society, such as ethnic minorities, women, lower castes, or other groups.
- Sometimes discrimination is defined as judging individuals from different groups by different standards when hiring, paying or promoting.
- Overlapping with discrimination, and often confused with it, are employment differences based on substantial differences in skills, experience, work habits and behavior patterns from one group to another.
- Substantial pay differentials between women and men are not the same across the board, but vary between those women who become mothers and those who do not.
- Women and men make different occupational choices and prepare for many of these occupations by specializing in a very different mix of subjects while being educated.
- Just as minimum wage laws reduce the cost of discrimination to the employer, maximum wage laws increase the employer’s cost of discrimination.
- While it is obvious that discrimination imposes a cost on those being discriminated against, in the form of lost opportunities for higher incomes, it is also true that discrimination can impose costs on those who do the discriminating, where they too lose opportunities for higher incomes.
- In a market where wages are set artificially above the level that would exist through supply and demand, the resulting surplus of job applicants can mean that discrimination costs the employer nothing, since there would be no delay in filling the job under these conditions.

Capital, Labour and Efficiency:

While everything requires some labor for its production, practically nothing can be produced by labor alone.
Capital complements labor in the production process, but it also competes with labor for employment.
Capital tends to be scarcer and hence more expensive in poorer countries, while labor is more abundant and hence cheaper than in richer countries.
Poor countries tend to economize on the more expensive factor, just as richer countries economize on a different factor that is more expensive and scarce there, namely labor.
In the richer countries, it is capital that is more plentiful and cheaper, while labor is more scarce and more expensive.
Efficiency cannot be meaningfully defined without regard to human desires and preferences.
In a modern industrial economy, many goods are mass produced, thereby lowering their production costs, and hence prices, because of economies of scale, but repairs on those products are still typically done individually by hand, without the benefit of economies of scale, and therefore relatively expensively.

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Chapter 10 - Productivity and Pay

People are a key part of the inputs which produce output.
Most people do not volunteer their labor free of charge, so they must be either paid to work or forced to work, since the work has to be done in any case, if we are to live at all, much less enjoy the various amenities that go into our modern standard of living.
From the standpoint of the economy as a whole, payment for work is a way of allocating scarce resources which have alternative uses.
Workers would obviously like to get the highest pay possible and employers would like to pay the least possible.

Productivity:

While the term “productivity” may be used to describe an employee’s contribution to a company’s earnings, this word is often also defined inconsistently in other ways.
A worker using the latest modern equipment can obviously produce more output per hour than the very same worker employed in another firm whose equipment is not quite as up-to-date or whose management does not have production organized as efficiently.
The productivity of any input in the production process depends on the quantity and quality of other inputs, as well as its own.
The same principle applies outside what we normally think of as economic activities, and it applies to what we normally think of as a purely individual feat, such as a baseball player hitting a home run.
Whatever the source of a given individual’s productivity, that productivity determines the upper limit of how far an employer will go in bidding for that person’s services.
Just as any worker’s value can be enhanced by complementary factors—whether fellow workers, machinery, or more efficient management—so the worker’s value can also be reduced by other factors over which the individual worker has no control.
In countries with high levels of corruption, the bribes necessary to get bureaucrats to permit the business to operate likewise have to be deducted from sales revenues and likewise reduce the value of the product and of the workers who produce it, even if these workers have the same output per hour as workers in more modern and less corrupt economies as workers in more modern and less corrupt economies.
More generally, in almost any occupation, your productivity depends not only on your own work but also on cooperating factors, such as the quality of the equipment, management and other workers around you.
To say that the demand for labor is based on the value of the worker’s productivity is not to say that pay is based on merit.

Pay Differences:

Wages and salaries serve the same economic function as other prices that is, they guide the utilization of scarce resources which have alternative uses, so that each resource gets used where it is most valued.
Income Distribution:
- Some people are simply older than others, for example, and their additional years have given them opportunities to acquire more experience, skills, formal education and on-the-job-training—all of which allow them to do a given job more efficiently or to take on more complicated jobs that would be overwhelming for a beginner or for someone with only limited experience or training.
- No matter how much income passes through your hands in a given year, your wealth depends on how much you have retained and accumulated over the years.
- Although there is much talk about “income distribution,” most income is of course not distributed at all, in the sense in which newspapers or Social Security checks are distributed from some central place.
- In a market economy, those who get the direct benefit of an individual’s goods or services decide how much they are prepared to pay for what they receive.
- Not only do the numbers of people differ considerably between low- income households and high-income households, the proportions of people who work also differ by very substantial amounts between these households.
- The main reason for the more rapid rate of household formation is the increased tendency, particularly among unrelated individuals, to maintain their own homes or apartments rather than live with relatives or move into existing households as roomers, lodgers, and so forth.
Trends over time:
- Radically different trends are found when looking at statistics based on comparisons of top and bottom income brackets over time, rather than following individual income-earners over the same span of time.
- Whatever the relationship between one income bracket and another, that is not necessarily the relationship between people, because people are moving from one bracket to another as time goes on.
- Many people who never have a spike in income that would put them in the top one percent may nevertheless end up in the top 20 percent after many years of moving up in the course of a career.
- Just as there are spikes in income from time to time, so there are troughs in income in particular years.
- Many people who are genuinely affluent, or even rich, can have business losses or off years in their professions or investments, so that their income in a given year may be very low or even negative, without their being poor in any meaningful sense.
- The fundamental confusion that makes income bracket data and individual income data seem mutually contradictory is the implicit assumption that people in particular income brackets at a given time are an enduring “class” at that level.
- The higher up the income scale people are, the more volatile are their incomes.
Differences in Skills:
- Among the many reasons for differences in productivity and pay is that some people have more skills than others.
- Although workers may be thought of as people who simply supply labor, what most people supply is not just their ability to engage in physical exertions, but also their ability to apply mental proficiency to their tasks.
- In those times and places where physical strength and stamina have been the principal work requirements, productivity and pay have tended to reach their peak in the youthful prime of life, with middle-aged laborers receiving less pay or less frequent employment, or both.
- The rising importance of skills and experience relative to physical strength has changed the relative productivities of youth compared to age, and of women compared to men.
- Meanwhile, the dwindling importance of physical strength also reduced or eliminated the premium for male workers in an ever-widening range of occupations.
- A simultaneous rise in rewards for work and a growing welfare state that allows more people to live without working virtually guarantees increasing inequality in earnings and incomes, when many of the welfare state benefits are received in kind rather than in money, such as subsidized housing or subsidized medical care, since these benefits are not counted in income statistics.
Job Discrimination:
- While pay differences often reflect differences in skills, experience, or willingness to do hard or dangerous work, these differences may also reflect discrimination against particular segments of society, such as ethnic minorities, women, lower castes, or other groups.
- Sometimes discrimination is defined as judging individuals from different groups by different standards when hiring, paying or promoting.
- Overlapping with discrimination, and often confused with it, are employment differences based on substantial differences in skills, experience, work habits and behavior patterns from one group to another.
- Substantial pay differentials between women and men are not the same across the board, but vary between those women who become mothers and those who do not.
- Women and men make different occupational choices and prepare for many of these occupations by specializing in a very different mix of subjects while being educated.
- Just as minimum wage laws reduce the cost of discrimination to the employer, maximum wage laws increase the employer’s cost of discrimination.
- While it is obvious that discrimination imposes a cost on those being discriminated against, in the form of lost opportunities for higher incomes, it is also true that discrimination can impose costs on those who do the discriminating, where they too lose opportunities for higher incomes.
- In a market where wages are set artificially above the level that would exist through supply and demand, the resulting surplus of job applicants can mean that discrimination costs the employer nothing, since there would be no delay in filling the job under these conditions.

Capital, Labour and Efficiency:

While everything requires some labor for its production, practically nothing can be produced by labor alone.
Capital complements labor in the production process, but it also competes with labor for employment.
Capital tends to be scarcer and hence more expensive in poorer countries, while labor is more abundant and hence cheaper than in richer countries.
Poor countries tend to economize on the more expensive factor, just as richer countries economize on a different factor that is more expensive and scarce there, namely labor.
In the richer countries, it is capital that is more plentiful and cheaper, while labor is more scarce and more expensive.
Efficiency cannot be meaningfully defined without regard to human desires and preferences.
In a modern industrial economy, many goods are mass produced, thereby lowering their production costs, and hence prices, because of economies of scale, but repairs on those products are still typically done individually by hand, without the benefit of economies of scale, and therefore relatively expensively.