November 3, 2016

Explaining the real-wage/productivity disconnect

Comment on Editor on ‘Wages not commensurate with labor productivity in the USA’


The elementary formula for the real wage follows from the correct labor market theory.

The formula says that the real wage depends on productivity R and inversely on the expenditure ratio rhoE (the letter rho stands for ratio). The other determinants can be ignored for the moment. The formula gets longer when government and foreign trade are included.

An increase of the expenditure ratio rhoE lowers the real wage and vice versa. An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.

The disconnect between real-wage and productivity is explicable to a large extent by the deficit-spending of the household sector and runs in parallel with growing household sector debt. Note, that the formula is composed of measurable variables and is therefore testable.

Egmont Kakarot-Handtke