In response to my book review of Piketty, where I claimed in my cutesy “Jetsons” example that a slow-down in capital accumulation would reduce the growth in workers’ real incomes, people have been throwing BLS charts in my face. To take an example from today, on Twitter:
— Professor Zaius (@ProfessorZaius) June 3, 2014
This is the paper to which he links. From that paper, here’s the money chart that supposedly blows up my claim that workers get paid more as capital accumulates:
Yikes! Everyone see the outrage? The productivity of labor has been rising nicely for decades, and yet real labor compensation hasn’t kept up. Therefore, according to my critics, I’ve got my head buried in my Econ 101 textbook and need to look out the window at the real world. Workers apparently don’t get paid more, even as accumulating capital goods make their labor hours more physically productive.
I will do a more comprehensive response elsewhere, but here I just want to post the results of a simple Excel demonstration. I used a version of the Solow growth model, but instead of the usual “Cobb-Douglas” functional form, I picked one that allows for the factors of production (i.e. capital and labor) to earn different shares of total output, depending on which one grows faster.
I’m not going to dwell too much here on the meaning of it all. Just note in the screenshots below that capital and labor both earn their marginal products; there is no “exploitation” going on here. And yet “productivity”–which the BLS defines as total output divided by unit of labor input–grows much faster than the real wage rate. So once you wrap your head around my example below, look again at the chart above and see if it changes your interpretation of what it means for marginal productivity theory, and my claims about Piketty.