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Principles of Economics- Mankiw (5th) 396

Principles of Economics- Mankiw (5th) 396 - 408 PA R T S I...

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408 PART SIX THE ECONOMICS OF LABOR MARKETS CASE STUDY PRODUCTIVITY AND WAGES One of the Ten Principles of Economics in Chapter 1 is that our standard of living depends on our ability to produce goods and services. We can now see how this principle works in the market for labor. In particular, our analysis of labor de- mand shows that wages equal productivity as measured by the value of the marginal product of labor. Put simply, highly productive workers are highly paid, and less productive workers are less highly paid. This lesson is key to understanding why workers today are better off than workers in previous generations. Table 18-2 presents some data on growth in productivity and growth in wages (adjusted for inflation). From 1959 to 1997, productivity as measured by output per hour of work grew about 1.8 percent per year; at this rate, productivity doubles about every 40 years. Over this pe- riod, wages grew at a similar rate of 1.7 percent per year. producers make greater profit, and apple pickers earn higher wages. When the
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