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Wages: producing more, earning less, efficiently |
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Efficiency in the labor market. A perfectly competitive labor market produces an efficient outcome. Consider a simple economy with a fixed amount of land owned by little land owners who compete for labor from many unorganized workers who sell their labor competitively. Say there are 10 workers for each one square mile farm, and if a landowner hired only nine his revenue would fall by $20,000 per year. competition for workers will drive the wage rate up to $20,000 per year or a hair less.
Now suppose a new type of plow is designed that makes workers much more productive. Now with 10 workers per farm the 10th worker (economists say the “marginal” worker) would do very little good because having 9 workers with the new equipment does as much as, perhaps, 18 could do previously. The 10th worker now increases revenue by only $5,000 per year, compared to having only 9. In this case the competitive (efficient) wage will fall to $5,000 per year, even though the workers are producing much more.
When average product goes up, wages can go down with an efficient market
Economics tells us that the marginal product of labor has decreased from $20k to $5k per year and this is true. But the average product of labor has increased. It sounds fair to say “their marginal product has declined so they are paid less,” but no good economist would actually claim it is fair because economics provides no theory of fairness to cover this situation. This is not a new idea; it is a standard economic example, but one that is not much discussed because it points out a weakness in economics. It does not indicate that economics is wrong. The competitive market outcome is “efficient,” and workers are paid their marginal product, exactly as economic theory claims. But the result means much less than many take it to mean.
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Is efficient better?
In the simple world of our example, the market outcome is efficient, and any goverment program, such as park-building, designed to raise wages, probably will not be. Does this mean the low-wage market outcome is better. Most economists will say yes, but a careful, well-trained economist will admit the economics gives no answer.
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http://zfacts.com/p/382.html | 01/18/12 07:22 GMT
Modified: Wed, 31 May 2006 18:23:05 GMT
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