NY Times editorial:
Without the law, called the Davis-Bacon Act, contractors will be able
to pay less, but they’ll also get less, as lower wages invariably mean
lower productivity.
Sorry? You what? " Lower wages invariably mean lower productivity"? What the hell are you smoking and may I have some please? Is the (self-proclaimed) newspaper of record really stating that if an hourly wage falls from $15 an hour to $10 an hour then that worker does 33% less work? Really?
Do they also believe that the opposite is true? That is wages rise by 50% that productivity will automatically rise by 50%? If so, why aren’t they calling for a $100 an hour minimum wage and make everyone colossally, greasily rich?
Have they not noticed what is happening to the, just as an example, textile industry? US workers and Chinese workers seem to have, at least in certain factories, similar levels of productivity. We also know that the Chinese are paid some $150 a month and the US workers that every few days…..so the idea that lower wages automatically mean lower productivity seems a touch, umm, odd.
Now there is a link between wages and productivity but it isn’t the one they’ve noted.
Associated with this problem is the misunderstanding of what international
trade should do to wage rates. It is a fact that some Bangladeshi apparel
factories manage to achieve labor productivity close to half those of comparable
installations in the United States, although overall Bangladeshi manufacturing
productivity is probably only about 5 percent of the US level. Non-economists
find it extremely disturbing and puzzling that wages in those productive
factories are only 10 percent of US standards.
Finally, and most importantly, it is not obvious to non-economists that
wages are endogenous. Someone like Goldsmith looks at Vietnam and asks,
"what would happen if people who work for such low wages manage to
achieve Western productivity?" The economist’s answer is, "if
they achieve Western productivity, they will be paid Western wages"
— as has in fact happened in Japan. But to the non-economist this conclusion
is neither natural nor plausible. (And he is likely to offer those Bangladeshi
factories as a counterexample, missing the distinction between factory-level
and national-level productivity).
The link is the other way round. Wages do not determine productivity, productivity (at the level of the national labour market) determines wages.
The Davis-Bacon Act mandates "prevailing wages" which almost always turns out to be union wages. Which, if unions are actually doing their job, is above the rate which would prevail if wages were indeed based purely on the productivity in the national labour market. (To understand this, think about what a union actually claims it is doing. Getting more of the value produced in the system for the labourers than would prevail in a free market.) It may or may not be a good idea to lift this Act for the present (I think it’s a good one but that’s an entirely different matter) but the statement by the NYT is nonsense.
Now we know that newspaper editorial offices are not exactly hotbeds of economic literacy but you’d think that they might actually read the people who write for their own paper. Or, perhaps, discuss matters economic with the economists that they do in fact already employ. The writer of the above quote?
Paul Krugman.
Paul, phone the office. They need you.
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