Productivity and Pay

Productivity and Pay September 24, 2010

I’m reading the book Basic Economics by Thomas Sowell and I’ve been really impressed with the content so far. Sowell explains economic theory in a way that makes it interesting, easy to understand, and applicable to today. I’ll be using his book as a guide for many “Faith and Economics” posts in the future, including today’s post about productivity and pay.

Unless we’re volunteering (or required) people are generally paid for their work. Commonly called income, this pay can be thought of as both an incentive and constraint. To those working (or potentially working), pay is an incentive to do work. For an employer, pay is a constraint that forces it to value the scarce resource of labor. People won’t work unless the incentive is great enough and employers won’t pay unless the labor will contribute to the bottom line.

So what determines how much a person is paid for their work? The answer to this is supply and demand. The more people that can perform the activity, the lower the pay. Why? Because the employer can choose between a lot of potential workers who are competing to get the job. The same concept holds true for unique professionals who can demand a higher wage for their specialized skill.

Productivity is a key factor because a worker’s value can be enhanced by making other factors more efficient. Better machinery, location, management, and other resources can create higher quality goods and even lower the cost to produce the goods. The principal is simple, but can be viewed negatively when discussing business in Third World countries.

I’m not an advocate of sweat shops by any means, but when considering labor in other countries from an economics standpoint, one must look at the quality of the resources used to make the product. Factors like highways, trains, and airways are often not as advanced as resources in developed countries, which means a higher cost of production and leaves a smaller fraction to workers. The amount left for workers is even smaller in countries where bribery of government officials and businesses is commonplace.

This post just barely touches the tip of the iceberg regarding the ethics of doing business with Third World countries and isn’t meant to argue for or against the subject. I really just wanted to provide an easily digestible post about the basics of pay and productivity, and leave you with economic principles to develop an opinion on future talks about the subject.

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