What Determines Wage Rates?

From: J
Sent: Friday, August 16, 2019 9:27 PM
To: Walter Block
Subject: Question about wages and average worker productivity

Hello Dr. Block,

This is J. I’ve emailed you a handful of times before with questions about Austrian economics and libertarian theory. I’m grateful for the patient and informative responses that you’ve given me. Another question has come up and I figured I’d send it your way, as with my previous questions. Here is my attempt to keep it brief and to the point:

As best as I understand it, the Austrian explanation is that wages in a free market are determined, in general, by the supply and demand of labor. More specifically, it is a worker’s marginal productivity that dictates his/her wage level. An increase in a worker’s marginal productivity facilitates an increase in his/her wage, and vice versa.

I’ve come across some data that would suggest that there is a (relatively) recent deviation between this principle and the economic reality in the USA. Specifically, data appears to suggest that from about the 1940’s to the 1970’s, average wages and worker productivity increased in proportion with each other. However, starting in the mid 1970’s, worker productivity appears to continue its increasing trend while average wages increases trail off significantly in comparison. The data that I am citing can be found at:


If you are willing to share any insight into an Austrian explanation of wages and worker productivity diverging, I would greatly appreciate it. Thanks again for all of your generous advice.

Sincerely, J

Dear J:

Wages only TEND to equal marginal productivity. Wages only EQUAL marginal productivity in equilibrium, or, in the evenly rotating economy. But, we never, ever get there, in the real world.

Who are you going to believe: government statistics or your lying eyes? Who are you going to believe: government statistics or apodictic necessarily true economic theory?

When wages do not exactly equal marginal productivity, there are inexorable market forces that push them in that direction.

Joe’s marginal productivity is $10/hour. His salary is now $8/hour. Shouldn’t we expect that some entrepreneur will offer Joe $8.01, and, another $8.02? You see where this is leading.

Also, given his marginal productivity is $10/hour, if his wage is $15/hour, his employer will lose money, and tend to go bankrupt.

I’m assuming there are lots of Joes out there in both cases. Or, even one of them, but then things will take more time to work out. Lots of time.

Best regards,



4:37 pm on September 19, 2019