(This is an archived extract from the book Patterns of Power: Edition 2)
Employers require suitably qualified workers and, in classical economic theory, they can afford to pay more per person if employees are more productive.[1] They also have to take account of ‘supply and demand’: the employers are competing for workers from a total supply of suitably-qualified people – so they have to adjust the wages that they offer to recruit enough labour to meet their needs.[2]
The operation of supply and demand is affected by the wage levels of all the employment opportunities in a country. Average wages reflect the average productivity of the country,[3] which is in turn affected by several factors:
· Education and training (3.2.5) can make labour more productive.
· New technologies, better facilities and better infrastructure can make industry more efficient (3.2.8).
· The regulatory burden (3.3.1) can affect the productivity of industries.
A country like America, for example, has high overall productivity, which lifts its average wage-levels; employees are therefore able to ask for higher wages than those in less developed countries.
The labour market cannot function effectively unless there is a pool of labour for employers to draw upon. If the level of unemployment is too low, wages increase rapidly and this leads to inflation (3.3.8.3); economists use the term ‘Non-Accelerating Inflation Rate of Unemployment’ (NAIRU) to describe the level of unemployment which is necessary to avoid inflation.[4]
© PatternsofPower.org, 2014
[1] Samuelson and Nordhaus explain the link between productivity and wages on pages 220-221.
[2] Employers’ demand for labour is determined by whether they can increase their profits by taking on more people, which depends upon whether the total employment costs of additional sales (including fringe benefits and employment taxes), plus the cost of the supplies they need, will be matched by the selling price that they can obtain. Samuelson and Nordhaus describe the operation of supply and demand in the labour market in Economics, chap. 13, pp. 218-235.
[3] Samuelson and Nordhaus explain international differences in wage rates in chap. 13, op. cit., pp. 220-222. They also quote Paul Krugman as writing:
“Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its living standards over time depends almost entirely on its ability to raise its output per worker.”
This quotation appears in Economics, chap. 33, p.650. They give the citation as Paul Krugman, The Age of Diminished Expectations (MIT Press, Cambridge, Mass., 1990), p. 9.
[4] Samuelson and Nordhaus described the relationship between inflation and unemployment, and the concept of NAIRU, in Economics, chap. 30, pp. 587-597.