Is There a Tendency for Wages to Equal Productivity Under Free Enterprise? Yes.

From: C
Sent: Thursday, November 09, 2017 11:03 AM
Subject: Wages and labor productivity
Hi, in an article ( you co-authored, it states, “a key economic principle: wages reflect labor productivity.” How did you reach the conclusion that wages always reflect labor productivity? Have you checked to see if there are any counterexamples? How could we determine what the labor productivity was, without knowing what the wages were, and then look at the wages to see if they did indeed reflect the labor productivity?

If a concrete example would help, suppose Jerry Givens executes 62 people over a period of 17 years, or about 3.6 executions per year. How productive was Jerry Givens over those 17 years?

Dear C: Thanks for your reference to this article of mine: Krasnozhon, Leo, David Simpson and Walter E. Block. 2015. “Fair trade: Its Real Impact on the Working Poor.” The Review of Social and Economic Issues (RSEI). Vol. 1, No. 2, Spring, pp- 5-28;;; translation by ‘Alexandru Butiseacă’;

Yes, I still maintain that under free enterprise, wages tend to equal marginal revenue product. How do I know this? It is due to the praxeological fact that if the two diverge, we reach an unstable situation, and market forces come into effect to once again move in the direction of equalizing them. For example, if wages are higher than productivity, the firm will lose money and eventually go bankrupt. When wages are lower than productivity, workers will leave for greener pastures. As an empirical matter, the best estimate of productivity is thus actual wages, in the marketplace. It would be very difficult determine the level of labor productivity without knowing what the wages are.

But this only applies to the free market system. Regarding employment in government, we have no reason to believe there will be any tendency for wages to equal productivity. In Rothbard’s view, in any case, we should subtract the government sector from GDP, rather than add it to it. This implies that productivity in the “public sector” is negative, while wages are certainly positive there. Givens is not employed by private industry; thus, we have no fix on his productivity, one way or the other.


7:24 pm on December 20, 2018