What does Mark Thoma mean?
I’m having some trouble deciphering the economic principles underlying the following argument that Mark Thoma made regarding economic inequality:
As for inflation, in general, if wage growth equals inflation plus productivity growth, there is no inflation pressure.
Now I understand an argument which allocates to wages the productivity growth derived from more efficient workplace practices but my understanding of labor market economics is that the majority of productivity gains result from capital investment, so if all, which Thoma seems to imply, or even most, productivity growth is allocated to labor then none, or only some, of the gain will be allocated to capital. Yet, we know that capital will not invested in an environment of substandard, or non-existent, returns, so when labor is awarded a benefit that results from capital investment how does this not lead to inflationary pressure?
The next sentence gives better context: “So wage growth in excess of inflation is not necessarily inflationary.”
The concept he’s implying is that productivity gains allow shrinking total wage expenses by reducing the number of DNA machines floating around the factory floor despite the increase in hourly cost per meat-machine retained.
He’s also not considering structural inflation as inflationary in his scenario; but that’s just an adjective oversight.
In a competitive equilibrium, W/P = MPL. i.e. the real wage (nominal wage divided, W, by the price level, P) equals the marginal product of labor (MPL). It’s the first order condition for profit maximization.
Then, in percentage terms,
(% change in W) = (% change in P) + (% change in MPL)
Wages rise by an amount equal to the rate of inflation plus productivity growth. When this holds, the equilibrium condition is satisfied continuously. In equilibrium, there is no tendency for anything to change, including the rate of inflation.