Supply and Production
Labor, Finance, and Production
For this week, please read Ch. 4 and 7 in the text. These notes go along with the reading.
Minimum wage
In theory, an increase in minimum wage should result in a lower demand for labor, but in practice, that often tends not to happen, particularly if labor is not the driving factor behind business costs. For example, if a retail store has payroll expenses of about 10 to 15 percent of revenue, an increase in payroll of a couple of percent won’t make a dramatic difference. In my experience, retailers tend to complain mostly about rent, not payroll, as the most troubling business expense.
Division of labor
Adam Smith’s On the Wealth of Nations (1776) is a lengthy and systematic overview of economics, motivated by the question of why some nations are wealthier than others. (Instead of “wealth,” we today would typically measure economic well-being as average income or average GDP.) Smith found that the division of labor, or labor specialization, results in higher productivity (to use the modern term). Smith begins his study by recounting a visit to a pin factory, common pins being an important part of the emerging Scottish textile industry. In this week’s discussion, we reference Smith’s visit.
Today in the 21st century, we take labor specialization for granted. Back in Smith’s day, such specialization was less common. For example, George Washington described himself as a farmer, but he actually owned several farms (or plantations), with much of the work done by African-American slaves. He was also a land speculator and investor, held a variety of public offices, was an officer in the colonial militia, and operated a grinding mill. Other Founding Fathers like Franklin and Jefferson also had quilt-work careers, a little of this, a little of that, and not one specialization.
Labor specialization is so important in today’s economy that zero net jobs have been created in the US economy, in the 21st century, for those with a high school education or less. Instead, new jobs expect college-level skills, which includes skills earned with technical associate’s degrees. That is why there is little demand for low-skilled general workers, as was common 50 or 100 years ago, with people finding jobs in factories. But over the last 30 years, manufacturing output has doubled in the US, with fewer low-skilled workers, but with increases in the number of technicians and engineers.
One thing that has remained the same over the past 100 years is American productivity. The US is now the world’s most productive large economy, ranked third after the much smaller economies of Norway and Luxembourg. Even back in the late 1800s and early 1900s, the US led the world in productivity.
Production
In economics, output, product, production, and quantity supplied mean essentially the same thing: goods and services created for use by consumers, businesses, and other organizations. Output requires inputs, also known as factors or resources. These include what was traditionally called “Land,” but implying all natural resources and raw material; Labor, the physical activities of workers; and Capital, meaning physical capital, which accountants call Property, Plant and Equipment. Additionally, a key factor in the present day is Human Capital, the skills that people learn and exercise, so both education and the products of education, and including intellectual property, that can be legally safeguarded by patents, trademarks, and copyrights. Two other important factors of production sometimes overlap with Human Capital: Technology, applying science in meeting economic goals, and Entrepreneurship, organizing to make production efficient and effective.