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September 10, 2005

What’re They Smoking?

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.

September 10, 2005 in Economics | Permalink


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Tracked on Sep 15, 2005 3:55:01 AM


There are actually causal links running from higher wages to higher productivity, though not as strong as the ones running in the other direction. Firms that are required to pay higher wages will be more selective in hiring and therefore obtain a more productive workforce. Also, they will tend to substitute capital for labor, thus making labor more productive. I believe it has been argued (perhaps not convincingly) that wage floors in fields like construction can serve the public interest by forcing firms to demand higher standards. The downside, of course, is that the less productive workers, and those replaced by capital substitution, are left unemployed. (The Times apparently thinks that “condemning many already poor and now bereft people to subpar wages” is worse than condemning some of them to unemployment, but that’s a separate issue.)

There are also other possible (but more controversial) links that don’t have to do with the behavior of firms. More productive workers are less likely to apply for jobs that offer low wages. Workers receiving higher wages have more to lose and are therefore have more incentive to do their jobs well. And workers receiving higher wages are less likely to quit, thus reducing the need to hire temporarily less productive trainees to replace them.

Posted by: knzn | Sep 10, 2005 5:29:10 PM

As a government contractor I have had several contracts under a program similar to Davis-Bacon Act (same intent aimed at government service providers such as, in my case, mechanics rather than the construction industry). The term "prevailing wage" is almost always 25%-30% higher than the local economy. It is a nice way for the politicians to get great paying jobs for the locals near the military installation. There is also a mandated benefits package (retirement, sick pay, holiday, allowance to wash work clothes) that far exceeds the local norms as well.

Often, this type of arrangement also comes with a collective bargaining agreement- Tim's unions. Oddly enough the collective bargaining agreement is sometimes lower than the prevailing wage act. However, the $1/hour that is sacrificed by electing the union also provides almost impenetrable job protection. Put simply, short of a felony it is difficult to fire a union worker on a military base.

I have been in situations where I paid my employees more than the unions guys got paid for short term work. The unions do not like this for two reasons- one is that my guys got more money (as they should for a temporary job) and the other is that my guys are far more productive (because they are under the threat of termination if they are not productive.) Of course, after we left the job site the union manipulated the master agreement so that we could not come back. They did not like the comparisons between their productivity and my guys at all.

Davis-Bacon and the other programs does nothing to increase productivity and in almost all cases are a net negative. The Times should see how the real world works for once.

Posted by: Greg | Sep 10, 2005 5:47:02 PM

Greg: I’m not familiar with the details of the Davis-Bacon act. It may have features (work rules, restrictions on termination, etc.) that offset the increase in labor productivity that would normally be associated with a wage floor. But my point is that, ceteris paribus, higher wages would be expected to have such an effect (“invariably” as their own effect, though possibly outweighed by other factors). Like Tim, I’m not arguing whether the Times is right or wrong to advocate Davis-Bacon; I’m just addressing the question of wages and productivity, on which I disagree with Tim. I think you’re experience supports my point, since the threat of termination would not be as effective if other jobs with similar wages were easily available.

Posted by: knzn | Sep 10, 2005 7:02:23 PM

Tim's experience does NOT support your point, because those "other jobs with similar wages" would be temporary jobs.


Posted by: Henriet Cousin' | Sep 10, 2005 11:06:38 PM

Is the New Orleans flood such a dire emergency that the President should invoke the Insurection Act? Or is it so routine that he should not suspend the Davis-Bacon Act? A real Democrat party political hack would say yes and no. I guess that makes the NYTimes editorial page a real political hack.

Posted by: Robert Schwartz | Sep 11, 2005 12:15:59 AM

I certainly do not disagree that there should be a link between higher wages and higher productivity, especially in Tim's electron based shrine to the free market. However, my experience is that if indeed that was the USG's intent (and I doubt that was the government's motivation) it has been thwarted by the usual odious regulations and restrictions. As usual, the government passes the laws and the smart guys figure out how to manipulate them.

Also keep in mind that union rates are usually based on these government dictated rates- often for work that has nothing to do with the government. The government increases these rates for inflation on a frequent basis meaning the union agreements that are based on them automatically go up as well without the need for renegotiations.

Posted by: Greg | Sep 11, 2005 4:22:21 PM

It is important that as many live bodies there as possible be put on some payroll, even though they may not posess any marketable skill. Part of the reason is the order derived from keeping them occupied rather than letting their wefare payments and the idle mind make work for the devil.

Posted by: Walter E. Wallis | Sep 19, 2005 1:53:36 AM

It is important that as many live bodies there as possible be put on some payroll, even though they may not posess any marketable skill. Part of the reason is the order derived from keeping them occupied rather than letting their wefare payments and the idle mind make work for the devil.

Posted by: Walter E. Wallis | Sep 19, 2005 1:54:46 AM