Why do wages go up with increased productivity due to capital?

[Farlsborough]

I'm still getting to grips with the Austrian school, please bear with me.

 

What I'm trying to iron out is stuff about wages, because it's one of the most common objections you meet. If anyone knows of a resource which explains it well, I'd love to be pointed in that direction.

 

What I don't understand is this: if a company uses their capital to make an employee more productive, why would they necessarily put the wages of that employee up? True, their output has increased, but why not take this revenue as increased profit (as is so often assumed to be done by the Left)?

The company would be well within their rights to say that the employee is not bringing anything better or new to the job, and that without the capital goods, their productivity would not have changed, therefore the company deserves to be the sole beneficiary of the increased output. If the employee was disgruntled and wanted to work elsewhere, they would be back to square one with their lower productivity, unless that company also uses it's capital similarly, in which case the dilemma is the same.

 

 

I realise that if they have to train and up-skill the employee to use the machinery, the labourer may demand more. But if it is literally the case that pushing a button creates five hats, and with the new capital, pushing the same button now makes ten hats... The output and profit has increased, but does this benefit the employee?

[Cornetto97]

I'm also new to austrian economics but have been interested in free market ideas for a while so happening upon it was a by-product of my reading into the free market.

 

The solution i'd pose to this question is that the employee now has been trained to provide more value for business A. Now business A have put capital into improving that employee and the employee has put time in improving his ability to be efficient. So now that employee has a practiceable skill that can also increase the efficiency of business A's competitor, business B. therefore in the interest in retaining this competitive advantage which business A have invested capital into, from falling to business B, business A would have it in their best interests to keep the employee satisfied with increased wages, or maybe more annual leave.

 

Also in your example of pressing a button to create more hats, that would actually be a investment in technology for production as oppose to an investment in bettering an employee's skills

[Libertus]

An employer would raise wages when they want to attract skilled (sought after) employees, including the ones already working there. Chances are, if you are a qualified and skilled employee, it's going to cost a lot to replace you, a lot more than what they pay you extra.

[Livemike]

As capital investment goes up wages as a proportion of total expenses go down.  Therefore wage increases affect profits less compared to not getting the full value out of the capital.  So hiring the best workers is more important, as is just hiring more of them to hasten the parts of the production process that weren't automated.  Remember also that it's _real_ (price adjusted) wages that matter.  So capital investment that increases supplies of goods makes them cheaper, meaning that real wages go up, even if money wages don't.  

 

For instance suppose you worked on a machine costing $1m, that depreachiates 10% or it's original value each year and interest rates are 5%.  The costs for using that machine are therefore $150K each year.  Suppose a worker could get $250K worth of production out of the machine and he can be hired for 50K a year.  That leaves $50K a year profit for the business owner.  Now suppose another worker is prepared to work harder, work through the shift so he doesn't have to take coffee breaks etc. and he can boost production by 5%.   That means that he's worth employing as long as he doesn't want more than $62,500, so assume you pay him something like $56K.    Now imagine you buy a machine that's twice as costly and twice as productive.  You put the good work onto that machine and he realises that he is making you a lot more money.  If he wants less than $75K it's still worth employing him, because he gives you that much extra profit. 

The more a business depends on processes that use a lot of labor the less they're prepared to pay for that labor.  When the process depends on less labor and more capital they don't care as much.

[rosencrantz]

The more a business depends on processes that use a lot of labor the less they're prepared to pay for that labor.  When the process depends on less labor and more capital they don't care as much.

 

 

That's a good point. In short, the important number to look for is the marginal cost of production. How much does it cost to make one more unit. An industrial revolution can only happen in a society where wages are already relatively high. If you had a cheap abundant labour force there would be no need to invest in a machinery that reduces the human factor. 

During the time of the fighting Empires in China, later emperor Qin installed a war economy that produced weapons en masse. All the parts for spears, crossbows and so on were standardized and the place of their origin did not matter. That allowed Qin to outcompete the other empires and finally to be victorious.

People often wonder why China did not pick up on that and followed the path to more industries and to have an Industrial Revolution 2000 years before the West. The reason is the marginal cost of production due to an abundance of cheap labour. The difference of the marginal costs of production was not gi enough to allow investments in labour saving devices and to profit from the investment.

[Max Hartford]

Most important thing for wage determination is: what would the employer lose if they had to do without the most marginal labourer in their production. The more capital goods workers have to use, generally speaking, the more productive they will be. Hence, by losing one of these labourers to a competitor, the employer will lose more if the economy is more capital-rich, hence driving up wages in general. 

Capital investment in a region serves to raise real wage rates in that region in general. This is both because saved-up capital funds are what are used by businesses to pay wages to workers, and because capital investment not directed to buying labor is usually directed to securing producer goods that will help make the labor hired more productive (machinery, tools, office buildings, research & development, training programs, etc…) Because producer goods are ultimately useless without the labor to use them, labourers in a region with a relatively abundant supply of producer goods are in a better position to demand higher wages than labourers in a region with a relatively scarce supply of producer goods. The labor of those in the former region is more valuable to employers because it serves to set in motion a more productive complex of producer goods than the labor of those in the latter region. Ignoring for the moment the great difficulties of talking about the price of ‘labor in general’, the least important use of labor in the former region will probably be more valuable to employers than the least important use of labor in the latter region. This means that market real wage rates will tend to be higher in the former region than in the latter region.

[Worlok]

Some companies give raises over time periods, like 6 months or 12 months. These raises represent the increased value of your skill and experience that you've gained over you time working. These types of businesses also have wage caps because the wage cap would be the maximum anybody could be worth in said position. They can, of course, fire you or lower your wages at any time if you aren't worth it.

 

Some companies will offer wage increases if you are going to quit or if there is obvious competition that they don't want to lose you to. 

 

Some companies with incompetent bosses only give you a raise if you threaten to quit or just say that you are quitting.

 

Over all, the better you are at your job, the more money you can make for the company. If you make twice as much money for the company as somebody else, you are worth up to twice as much as the next guy. Depending on wages, you might be worth more. If person A earns 50k and makes the company 200k, but person B earns 50k and makes the company 400k, he's technically worth his original 50k plus the 200k extra that he makes for the company over Person A. Basically, if the person B quits because the company won't pay him 100k, the company is losing a quarter mil a year just because they won't give Person B a tiny raise in comparison. They obviously want to keep that guy.

 

Certain services or items are worth certain amounts of money based on either how well you can offer a service or how many items you can produce. Wages are set based on subtracting your wage from what you produce and the sum has to be a significant net positive for the business to pay you anything at all.