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Tuesday, 3
December 2019


Explainer
08:24

How to turn higher production into higher wages

by Peter Franklin
Commuters walk across London Bridge. Credit: Getty

Richard Jones is the physics professor whose paper on transforming the UK economy got the thumbs-up from Dominic Cummings last week.

I wrote a piece about his arguments on Monday, but there was something else in the paper that I didn’t have room for. It’s about the crucial relationship between productivity and wages.

Jones begins with the uncontroversial observation that “the growth of real wages tracks overall productivity growth.” This stands to reason, as the more productive that workers are the more they can command in the market place for their time. It’s surely no coincidence that in a decade of very low productivity growth we’ve also seen wages stagnate.

So to get wages growing again we need to boost productivity. But, wait! There’s a complication:

“The relationship between wages and productivity growth at the city and firm level is less clear than it is for the economy as a whole. Recent results suggest that in the UK, since the financial crisis, productivity gains at the firm level don’t get passed on to workers. More is passed on if a whole sector improves its productivity, or if productivity is increased in a city…”
- Richard Jones

What might explain this pattern? In a word: options. If it’s just one market leading company dominating all the progress in a particular industry, then it won’t have to compete as hard for workers. If alternative employers are falling behind, then the employees at the dominant company are less likely to jump ship. As for cities, if the local economy as a whole is flourishing, then that means lots of choice for the resident labour force — and naturally they’ll go where the best prospects are.

So two lessons:

Firstly, market concentration (i.e. the growing dominance of a leading firm) is not good for wages — and therefore worth bearing in mind when it comes to competition policy, the regulation of platform capitalism and assessing the side-effects of ultra-low interest rates.

Secondly, the more easily workers can travel around in a particular metropolitan area, the bigger their choice of potential employers; this means that by under-investing in public transport we waste the wage-boosting potential of our cities.

A captive labour force may be good for a dominant company in a particular place or sector, but it’s not good for the economy as a whole. Productivity depends on the most efficient allocation of resources, including human resources — or, to use less horribly corporate language, when people get the chance to work where they can make the biggest difference, everybody benefits.


Today on UnHerd

13th December 2019