2. Productivity

An employee of General Motors is likely to wonder at times why his pay can’t be raised. “Even if it were doubled or trebled,” he may complain to his wife, “it would never be felt by GM.”

True enough. During 1955 the average pay of an employee of GM was $5,011. Yet GM’s profits for the year were $1,189,477,082 (or $3,751,477,082 before any ascertainable taxes) on a total business of $12,443,277,420. It can be seen at a glance that doubling the pay of this employee would be no more noticeable in the whole enterprise than would be the adding of another automobile to those now owned in the State of Michigan.

Doubling the pay of all GM employees, however, would be quite a different story. It would eat up in one year more than the total value of the firm’s real estate, plants, and equipment.

I am not concerned here with GM’s wage problem as such. I do not know whether their present wage scale is too low, too high, or just right. The only present purpose of these figures is to illustrate the difference between a narrow view and a broad view of the wage problem.

An automobile is the sum of many simple parts working together in simple ways. In like manner a complex economic problem is composed of simple elements which can best be seen by looking under the hood, so to speak.

In trying to see what makes wages rise, let’s consider first a lone pioneer instead of a single employee of GM. He is producing things entirely for his own use. What he produces — potatoes, etc. — is his wage. He needs no Ph.D. in economics to know that he can consume only what he has produced, and no more. The only way he could double his wage would be to produce twice as much. He couldn’t raise his wage by as much as one per cent except by producing more. This is like saying that 1 = 1.

Now if a neighbor moves in, the two pioneers might trade with each other some of what each produces — let us say in equal amounts. The same rule would still hold true. Together they could consume only what they have produced. Or we might say that 1 + 1=2.

As the society increases, eventually reaching a laboring force of 63 million, the same would still be true.

Not all persons in a nation’s economy, of course, produce the same things. Nor do they produce the same amounts. Furthermore, some work alone and others work in groups as in a corporation. It has been estimated, for instance, that there are nine million different business enterprises or farms in the United States, and some eight million different commodity items or services in which they deal.

Production Comes First

Estimates have even been attempted of the total amount of production for all these producers, added together in terms of dollars of presumed worth. For 1955 the total estimated figure was $322 billion. Goods and services were added together, roughly, on the basis of consumers’ appraisals of their worth in relation to one another. I can’t vouch for the accuracy of any such total figure. In fact, the task seems impossible for more than one reason. But even so, this much can be said about it: Whatever the right figure may have been, the only way to have doubled it as such (in stable dollars) would have been to have produced twice as much. There is no way by which arbitrary action or edict could have raised it by as much as one per cent, unless it had somehow increased production.

CHANGES IN PRODUCTIVITY AND WAGE RATES — UNITED STATES

SOURCE: This chart is designed so that a constant percentage increase would appear as a straight line. The values of product and wages are both expressed in dollars of constant buying power. The data for product are for the private sector, and are from the series by John W. Kendrick in his paper, National Productivity and Its Long-Term Projection (National Bureau of Economic Research, May 1951), brought up to date by the National Industrial Conference Board. For the data on wage rates, see Chapter 1, p. 11.

No more need be said about productivity and its importance in the question of what makes wages rise. The simple principle involved, for one person or for 63 million persons in an exchange economy, is that consumption cannot be more than production.

Wages Parallel Productivity

Some want to know, however, whether the facts on wage rates square with this theory. Has the history of the United States borne this out?

Some estimates of the value of output per hour for the private sector of the national economy have been made available, giving us a basis for comparing productivity with wage rates since 1910 (see chart). The relationship is close, except in a few instances.

From 1930 to 1933 real wages ran considerably ahead of productivity — or more accurately, wages continued their upward trend despite falling productivity. But a readjustment soon got under way, and the seemingly excess wage rate was completely corrected by 1941. On the other hand, wages seemed to fail to share fully the increases in productivity from 1916 to 1919, and again in the middle twenties.

If our theory is sound, one may wonder why any divergence at all between the two occurred. One reason might be errors in the data, of course. Another is that the two are not precisely different expressions of the same thing, as are “production” and “product wage” for a lone pioneer. Not all our national product goes for wage payments. Roughly, about two-thirds of it goes for wages and salaries, with the remainder divided about equally between (1) pay for current effort by those who are self-employed, and (2) payment for the use of savings that have been invested in tools and equipment.

But the matter of dividing available goods and services into pay for current work as distinguished from pay for savings from past work is another subject, to be discussed subsequently. Present concern is with the relationship between wages and productivity. The correspondence is close, as it must be, because wages must come from production and can rise on a sustained basis only from increased productivity.