crossposted from Northwest Indiana Politics

There are two, and only two, reasons why somebody should get a raise. The first reason is that the money that is being used to pay the salary is being devalued (inflation). But that sort of raise is just getting you to tread water in a rough sense. You’re not really getting ahead because inflationary price rises eat up the entire salary increase and usually more. The second thing is that productivity has risen and you’re creating more goods or services for the same inputs. This is labor productivity. It is the one thing that allows for real sustainable rises in wages.

An increase in labor productivity means we have to work less to get the same lifestyle or the same work earns us a better one. The initial gain goes to the capitalist. He’s the risk taker who made a bet to pay wages in advance of production and he’s gotten a better deal than he bargained for. But if he doesn’t quickly distribute those gains, he’ll lose out because his competitor capitalists can offer better wages and disrupt his operations by hiring away his best, most productive workers.

For workers, a fluid labor market that makes worker poaching easy is vital to distributing labor productivity gains and helps keep the balance between labor and capital healthy. But there are forces that have been hardening the labor markets, and it’s costing us all.

While unions sense the importance of increasing labor productivity to some extent by creating training and certification programs their approach to labor contracts does not take it into account. Instead of promoting labor fluidity, rigid classifications are in vogue. This makes it easier for the union to negotiate salaries because they’re negotiating categories, not people. But it doesn’t serve the workers well.

Another productivity problem is that there’s a persistent gap between public productivity and private productivity growth. Private sector productivity growth has persistently exceeded public sector productivity growth. This creates a growing gap between what an individual worker can accomplish in each sector and a drain of talent away from the public sector.

This persistent gap in labor productivity improvement rates is a key reason why socialism doesn’t work and capitalism does. Literally billions of people have worked over the course of the 20th century to fix this. Nobody’s come close. That’s unlikely to change anytime soon.

The cure for this is to try to get as much as possible into the faster improving private sector and keep as little as possible in the slow improving public sector. If the public sector is small enough, public spirit/public service in the population will be enough to get the small jobs that can’t be privatized done in a reasonable fashion. But stuff too much into the public sector and look out.

8 thoughts on “Productivity”

  1. There are also sectors that are somewhere between public and private. The legal profession, for example, is technically private, but operates primarily through the (public) court system and its adjudication and enforcement mechanisms. It is not at all clear that improving the productivity of lawyers would improve the overall productivity of the economy: that would happen if there were fewer incentives to file bogus lawsuits and fewer laws and regulations offering the opportunity to use litigation as a business strategy, but under the current circumstances, the impact would likely be negative.

    The banking industry is also a theoretically private industry that has considerable overlap with government activities. And private universities absorb government funding, via grants, loans, and tax exemptions.

  2. A public sector job’s main rationale is to make the private sector more productive.

    So counting just the internal productivity of a government job is misleading. A better question is, how does this expenditure of public moneys on public employment aid the private secotr productivity?

    For example, state highway patrolmen are public sector jobs that should increase the private sector by help traffic flow more smoothly and with less risk for the private users.

    Here in California, the state took over the job of running the electric power grid from the private utilities. The rationale was that it now allowed independent power producers to “make a market” in electrical generation.

    Result? Prices for retail electricity are higher than ever. Causation or corrolation?

  3. David Foster – I agree with you that we do too many lawsuits. That’s nothing to do with productivity though. Productivity is having whatever volume of lawsuits done for less money overall and that *would* improve the country’s economic picture. The arbitration industry, by diverting disputes out of expensive court cases and into lower cost arbitration procedures is an example of increasing productivity in the legal realm.

    There is always a dividing line between what is private and what is public and the line shifts over time and space. If you’re caught between the two states, things can be a bit confusing and your results are going to be sub-optimal too.

    Joseph Somsel – I think that your vision is attractive but ultimately problematic. Efficiency is not the be-all and end-all of everything. Take the humble monastery. In some cases they are aggressively anti-efficient. There is nothing so inherently anti-efficient as long periods of contemplative meditation. What does the public sector do for them? It does the same as for everybody else. Has the public sector failed because the monastery remains as it has been for centuries despite the best efforts of the public employee? Not at all, because the value of contemplation and prayer are not something that fits in the efficiency paradigm.

    I view public employees as referees, there to keep even-handed “rules of the road” enforced without fear or favor. Any other government functions should be pruned back and handed off to private initiative as soon as is practicable.

  4. “Only” is one of those words I just can’t resist….

    Wages are prices which are charged for a service. There are many reasons why prices might rise, and you’ve identified two of them, but there are others. What about a dwindling supply? What about an “introductory” price? The latter is the source of most pay increases I’ve experienced personally. Productivity didn’t actually increase, the employer merely became convinced that it was indeed as advertised and therefore became willing to pay more.

    That brings the total to four, but I have a suspicion there are many more…

    Which doesn’t really change your point, I just can’t resist certain words… “Only, Always, Never, All…”

  5. Legal productivity differences go both ways here. The least productive attorneys in public practice generally have no private sector experience at all. The most productive public sector attorneys generally started public practice only after significant private practice experience.

    On the other hand, there are a whole lot of wildly unproductive private sector litigation attorneys who get away with it only due to ineffective oversight from the insurance companies who pay them. Those types are almost an order of magnitude more effective in wasting their clients’ money than public sector attorneys. AFAIK, there is nothing more wasteful in legal practice than a good long trial waged by unproductive, overbilling, private litigation counsel funded by compliant insurers.

    All these are “inside the legal profession” matters, and do not address the societal costs of the American legal and judicial systems. Much of those societal costs are due less to overreaching by the legal and judicial systems themselves, and more to attempts by political elites outside the legal & judicial systems to garner and exert power over others without oversight by, and accountability to, the electoral process. There is also a tendency by economic interests to use the legal and judicial systems as a means of rent-seeking.

  6. Yes, one could make the situation more complicated if you wish and could include all sorts of wrinkles.

    If I was not clear, I both meant “normally” in the sense that I was not including aberrant circumstances like pandemics as well as “generally” not intending to deny the existence of the lazy and incompetent in the private sector or those industrious competents who buck the incentives of the public sector.

  7. Given the incredibly ineffective medical supervision by the state, the only effective system that punishes incompetent or negligent medical practice in California, is the plaintiff’s bar. Rather, I should say a small fraction of it. I spent 30 years acting as an expert for the state board in reviewing cases of suspected poor practice by physicians. I found that the doctors with substance abuse problems, usually readily agreed to treatment programs and did not fight the charges beyond a perfunctory attempt early on.

    The cases I saw were mostly the real abusers, sometimes with 30 cases of bad practice. In the cases that most readily come to mind, the state was almost helpless to punish them. The Attorney General’s office would appoint some young lawyer with no expertise in med-mal. In one very big case that took a week of testimony in he trial, the state attorney told me he had been trying a case before the Accountancy Board the week before. The defendant had an experienced lawyer who handled these license and medical staff issues every day.

    The medical malpractice bar was also plagued with incompetence, mostly on the plaintiff side. California has had good malpractice reform since 1975 so cases that do not have large damages tend to either go away or go to poor lawyers. Strong cases get settled quickly. Good plaintiff lawyers choose good cases that, for some reason were not settled. Sometimes its a plaintiff who refuses a fair settlement; sometimes a misjudgment about the issues. Here is an example where the failure of the state regulatory system has placed the regulation of the profession in private hands. The only way to get bad doctors out of the business is to make them too toxic to get malpractice insurance.

    I wish it were otherwise.

  8. Michael Kennedy – You won’t find me arguing about the poor quality of professional regulation. When you spread your efforts out to too many areas, it is inevitable that actual regulation will suffer. This isn’t really about productivity though.

    I would correct one other thing. A lack of malpractice insurance does not stop people from practicing medicine in most states. Your idea that suing them out of practice is thus not based on any state of law that I am familiar with. They can always get a job at the VA or in a prison or just simply put up a sign stating they have no malpractice insurance. People will go to see such doctors because sometimes perfectly good doctors ‘go naked’ to avoid high liability.

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