NZPA released a story about an Orchardist that tried to get out of paying some seasonal workers for a public holiday.  All well and good, the contractual obligations of an employer is a topic that is out of my league.  However, the final line of the article got my interest.

“When employers treat their workers well by paying their entitlements, their workforce is likely to be much more productive”.  This is the claim of the Department of Labour.  Now I think by itself this is a fair claim.  In the apple picking industry it can be difficult to quantify the amount of effort a worker is putting into picking.  The output of the worker depends on both the effort they put in, and the density of the fruit in the area they are picking (I did a little blueberry picking back in the day 😉 ).  It is also impractical to constantly supervise workers (as they tend to work over a largish area).  As a result of these factors, efficiency wages can increase effort and thereby increase the workers productivity.

However,  the context that DOL made this statement in wasn’t purely descriptive.  They were trying to tell employers that they should be more generous with their wages, as they should want higher productivity.  In this sense I disagree with them.  The employer realises that the productivity of their workers depends on the way they treat their workers.  If they choose to pay their employees at a low rate, it is because the expected benefit from paying them more is less than the cost of paying them more.  Now in the case of the apple orchard this was illegal.  However, the employer obviously felt that the probability of getting caught was sufficiently low that the cost of paying his employees (which includes the productivity enhancement, and the loss from getting caught times the probability of being caught) was less than the benefit from paying.

If this is DOLs line on productivity, they are treating employers like they are stupid.  They believe that they understand the relationship between employers and employees better than the employers and employees themselves.  While I do not have a problem with the idea that higher wages leads to greater productivity, I do have a problem with the idea that firms are not doing what is in their own best interest.  If this is how the DOL feels, they need to realise that employers goal is not to maximise the productivity of their workforce, it is to maximise the profitability of their business.

Some people may feel that is would be a good idea to intervene and force firms to pay higher wages and increase labour productivity.  If we did this output could rise or fall (depending on the relative effect on productivity), the amount of labour hired would fall (as you would need less labour to produce the same quantity of output), and the effect on prices would depend on the change in output (as we are moving along the demand curve).  Ultimately, we assumed that the firm would not want to do this unless the benefit was greater than the cost, if this is the case output from each firm would fall and prices would rise.  In the apple industry we face a world price, and for the consumer, the loss of output would be made up by imported apples.  However, the leftward shift in the domestic supply curve implies that producer surplus would fall.  As consumer surplus hasn’t changed, total surplus from the industry would fall.

So by forcing firms to set higher wages, to force a higher level of productivity than they would have chosen in equilibrium, we get greater unemployment and lower profit in our apple industry.  Not an outcome that people on either side of the political spectrum would be particularly happy with.

Note:  I am only talking about setting higher wages to receive higher productivity and how that influences efficiency.  I am not talking about the equity reasons for higher wages, and I’m certainly not talking about the minimum wage.  You can talk about that stuff if you have a point you want to raise, but if anyone gets all ideological and angry about it I’m going to be very mean to you!