Labor Productivity

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Notes on labor productivity

Labor productivity is a key element in the explanation of how the economy works. It is especially important with regard to wages. What follows is some material about labor productivity and investment spending that is a reorganization of what is presented in your textbook. Its focus is on the connection between labor productivity and wages.

Labor productivity is the value of the product or service you can produce in an hour, day, week or other unit of time. The value you can produce depends on the amount of work-product you can produce and the price at which that product can be sold. When the product is sold, the owner keeps part of that value as profit, and part of it goes to pay for other production expenses. The worker then gets the residual as the wage. (The Marxists like to talk about this as exploitation and expropriation of the surplus.) If you want a sustained increase in your real wage, you have to have an increase in labor productivity. However, you may not get a raise just because your labor productivity rises. Labor productivity may rise, thereby raising the value of your day’s work, but the owner can keep the increase as higher profit.

This raises two questions: How can you get to keep a part of increased labor productivity in a higher wage, and what contributes to systematic increases in labor productivity? First, your boss will want to keep you as a worker, assuming you are a good one. When the business cycle is at a point where actual GDP is near full employment and expanding, other firms will want to hire workers away from the company you work for. You get a raise to keep you where you are. The other way is to have a union that negotiates with the owner for a share of increased labor productivity. To answer the second question, consider the following. Systematic increases in labor productivity come from investment spending. Investment spending, in the broadest sense, refers to spending that creates more...
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