Higher Labor Costs Drive… Productivity Gains! Which Create Wealth. Inflation Can Do Good. IF You Let the Free Market Do Its Work.

We live better now because Agriculture went from ~95% of the workforce in the 1800’s to about 2% today.  How did that happen (mostly)?  Labor got expensive.  The industrial revolution gave people higher-paid, more attractive options to back-breaking stoop labor. So they left the farm.  Landowners either adjusted to that or they went bust.  Society was vastly better off for the disruption.

Last week I went camping (Spring Break with 2 toddlers – eeeek!).  We ate out twice in Santa Barbara, CA.  Both restaurants – family friendly mid-range – had converted over to counter service.  Place your order, take a number to your table, and a busboy would deliver it.  No more wait staff – even in a town with a major University. 

Counter-service restaurants are a micro example of how macro-level “productivity gains” manifest themselves.  Productivity gains = more output per unit of labor/capital/land.  You don’t get gains without a shift in how labor/capital/land are employed.  Making something more expensive (e.g. labor) is usually what drives that shift.

Higher Wages and Scarce Labor Force
=> Short Term Inflation
=> Long-Term Productivity Gains.
= Durable Wealth Creation

Labor costs do drive “inflation” shorter-term, but the long-term result is productivity gains if you let the free market work its magic.  If farm labor gets expensive, you buy a combine harvester.  If wait staff get too expensive, you switch to counter service.  The marginal returns from Do you want fries with that? no longer justify the marginal costs of hiring, retention, and wages.  The people who used to wait tables move on to higher-paying alternatives…

Society is long-term wealthier for that exercise of free-market choice.  Admittedly We don’t get “fries with that” anymore.  We also don’t toil in the fields or have butlers and ladies maids anymore.  The economy found more productive (and personally rewarding) uses for labor as its cost went up.

For some politics masquerading as economics unknown reason, a lot of “free market” commentators don’t want to let the actual free market do that work.

To them, rising labor costs must always be met with an immediate, panicked rush into a Fed-driven recession.  Throwing the long-term baby – productivity – out the window with the bathwater – short-term wage cost inflation.

But we also know productivity gains are the ONLY source of real wealth creation in an economic system.  Any other economic shifts just redistribute existing wealth.   Productivity grows the pie.  Everything else slices it differently.  The “free market” political agenda favors wealth re-distribution over real wealth creation…

It isn’t all politics.  I’ll close with a good tweet thread  by Micheal Pettis (economist who specializes in China) on how international factors have influenced the wage dynamic.

This is ideally how things should work. High wages drive automation, and automation drives wages up further as workers become more productive and businesses compete for workers. Meanwhile more spending by workers create more services jobs.

This is what used to happen in the US, but now, economies in a hyperglobalized world compete mainly by subsidizing manufacturing, directly or indirectly suppressing wages to do so. High wages now are more likely to drive offshoring than to drive productivity growth.

This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.