All the countries are trying to increase their per
capita income and living-standard according to the increase in productivity
while maintaining their competitiveness with innovations because labour is
relatively scarcer which might restrict the economy’s capacity absorb capital
without increasing wages and the general price-level, as found in the general
quantity theory of money.
Productivity is measured by output per labor (Y/L)
and output per capital (Y/K). If these increase over time, we can say that productivity
has increased and vice-versa. Productivity can be measured. We need
productivity growth-rate to decide growth of returns to factors of production.
We are here talking about productivity that increases supply capacity to sell
more at lower prices. In the market there is a competition to sell at low
price. A direct factor that drives productivity is knowledge or innovation.
More money-supply has reduced the cost of capital
with low wages increasing supply despite of low demand which has lowered the
general price-level and interest rates pushing the economy at the zero lower
bound or liquidity-trap for a longer period. At the zero lower bound cash
hoarding increases, not necessarily in banks, because the value of money goes
up in the face of lower prices, moreover everybody expects higher inflation in
the future because it is the our basic observation that prices increase with
time and the will to hold unlimited money also increase savings.
The zero lower bound also trims the possibility of
increasing investment and employment by reducing the borrowing cost or nominal
interest rate, but the central banks are trying to reduce real interest rate
and wages with inflation to incentivize the supply-side and profits which would
also increase the relative international competitiveness to survive in the
market-place.
A higher current-account-deficit (CAD) in the most
of the developed -world means you have to devalue, either by cutting on nominal
wages, interest-rate and prices (internal-devaluation) or by cutting real
wages, interest-rate and prices (external-devaluation) by increasing inflation.
In internal devaluation money-supply is tightened to lower inflation, to cut
down nominal wages and interest rate. In external, money-supply is loosened to
increase inflation and cut down real wages and interest-rate. But, we have
evidences of downward-nominal-wage-and-price-rigidity after a point. In most of
the developed world there has been a cut on real-wages despite increasing
productivity. There has been a real-wages and productivity gap since few
decades.
Nonetheless, when real wages are going down demand
too is likely to remain subdued resulting in lower growth rate. But, if, we pay
equal to the marginal-product or productivity, there would be no inequality-issue.
Economists favour reward to factors of production according to their product
which is the purpose of Economics (explaining income-distribution). It is among
the stylized-facts that share of labor and capital should be equal in GDP and
real-wages would rise in the long-run. Labor-saving technological progress and
higher productivity may be the reason for higher capitalists’ profits, but real-wages-productivity-gap
is observable in the charts.
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