Sunday, May 17, 2015

Don Boudreaux seems to pick and choose his view on average product and wages depending on what the liberal du jour is arguing

Recently, Don Boudreaux called Robert Reich sophomoric for suggesting that productivity (as the BLS measures it) and real wages should move in tandem. Even an intro student could tell you that wages are determined by workers' marginal product, not their average product! The conclusion:

"It, and it alone, should label him forever as someone not to be trusted to analyze any economic matter, including the economics of minimum-wage legislation."

Strong words coming from a guy that just a year ago (in an op-ed written with grad student Liya Palagashvili) was adamant that we should expect from theory that the market "links pay to productivity," which throughout the op-ed is the same BLS measured average product that Reich is referring to!

My view is this:

2015 Don is right about theory.
2014 Don and Liya are right about empirics.

This combination is a point in favor NOT of the idea that wages are determined by average products, but of the idea that the production function is something like Cobb-Douglas. When accounting for all compensation (not just wages) the labor share stays fairly constant and when accounting for compensation and deflating the nominal figures correctly average product grows with wages (which are equal to marginal product). These are both properties of a Cobb Douglas production function (although Bob Murphy has a really nice post on how other functional forms could produce a divergence between average product and wages that many people allege is happening).


  1. How is marginal product measured?

  2. Yah, DB is not very charitable to the people he disagrees with. That's one reason I stopped following his blog a while back, even though I agree with him on a number of issues (including that a $15 min wage would be a bad idea). That said, Reich is a pretty fun guy to beat up on. Paul Krugman had a lot of fun doing it in the 90's.

  3. Don says exactly the opposite as what you claim he says.

    In his own words:

    "Every principles-of-economics student knows that a worker’s pay is determined on the market by the value of that worker’s marginal product and not by the value of workers’ average product (or even by the value of the average product of any large class – e.g., “workers age 16-19″ – of workers). "

    It's Reich, not Don, claiming production is based on averages, not margins.

    1. Read my post again please - it's Don in 2014 that makes Reich's argument not Don from 2015

  4. Daniel, I think that if you're surprised by Don's hypocrisy, you've been reading him extremely charitably for years. His usual "empirical work can't overturn the idea that the minimum wage raises unemployment" and "these cherry-picked studies that show the minimum wage increases unemployment" combo is the prime example of that.


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