We have seen the future, and it sucks.

The Curse of Aggregation Strikes Again

24th May 2013

Don Boudreaux, a Real Economist, blows the whistle on Leftist hand-waving.

Ms. Warren and you are correct that worker pay in the long run is determined by worker productivity.  The productivity that’s relevant, however, is marginal productivity – namely, the value that ‘the last’ worker added to a class of production projects adds to the market value of the outputs of those projects.  But not all workers and not all production projects are alike.  The level of aggregation at which Ms. Warren and you conduct this conversation is meaningless for the point you wish to make.  You confuse trends in overall worker productivity with that of the marginal productivity of low-skilled workers.

If, all other things unchanged, consumer demand for neurosurgeons rises relative to that for general practitioners, the wages of neurosurgeons will rise relative to that of GPs.  The reason is that the marginal productivity of neurosurgeons will rise relative to that of GPs.  The same result will occur if, all other things unchanged, the number of GPs increases relative to that of neurosurgeons.  If the average productivity of physicians as a group rises over time, nothing in economic theory says that the productivity or the wages of all physicians must rise by equal amounts – by amounts equal to the rise in average physician productivity and average physician wages.  Indeed, nothing says that the wages of some kinds of physicians cannot fall even when average physician productivity is rising.

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