Productivity and wage

There is a way to increase wages for labours, which is to improve their productivity. This is very logical, while labours are more productive, they produce more products, they create more values for their companies, so automatically they should earn more incomes from their companies. However, if the total productivity is improved dramatically, it is possible to see an excess of supply. Though individuals’ desire is infinite, there is a limitation about how people want to consume and how much they can afford. People have preferences of diminishing marginal utility, they will not consume one product too many.

If there is a cap for people to consume, then this also means a cap for companies to produce. Then when the population productivity improves, it means companies require fewer labours to achieve the optimal output levels than before, it can mean a higher unemployment rate. When the population has higher unemployment rate, this can lead to a decrease in the average and median incomes among the populations, though the employed population receives higher incomes. In addition, people are more productive may not be caused by people’s individual improvement, it can be caused by the development of technology, for example, people use computers to deal with large datasets, they are not able to deal with large datasets because they improve their own skills, they can deal with large datasets because of the development of computers. In this case, people do not necessarily receive higher incomes, because their skills are not upgraded. Therefore, people’s jobs are taken away from them, the employed will not receive higher incomes, though the productivity is improved.

Therefore, there is not necessarily a link between productivity and wage.