These are relative terms. Let's say in 1980 I was flipping burgers for $3 an hour and making $10 for the company. Let's (just for the sake of argument, ignore inflation) say in 2020 I'm making $20 for the company. For my pay to keep pace with productivity gains I'd be making $6 an hour, leaving my employer $7 better off (they were making $7, now $14). My pay would've kept pace with productvity - it doubled, my pay doubled.

When people say that "wages kept pace with productivity growth" that's what they're saying - that a 10% increase in productivity resulted ina 10% increase in pay, not a $10 increase in productivity resulted ina $10 increase in pay.

This flies in the face of so many HN readers that claim that salaries are based on the value created by the employee.

> so many HN readers that claim that salaries are based on the value created by the employee.

That's because those people are sadly wrong. Salaries have never been based on value created. They have always been based on the minimum a company could pay for the talent they desire.

Value created is the ceiling, the floor is min(cost of employee's alternative, cost of employer's alternative).

> if all of it is passed back to the employee, then the goods produced don't actually get cheaper.

There's a spectrum between none and all.

Also, why wouldn't goods get cheaper? Scaling up production is easy so it's not a supply issue. There would be two outcomes: people would buy more goods overall (as has happened over time) or they would work less and enjoy more leisure time.

No bad assumption here: people say that productivity growth and wage growth ought be the same. If this was not the case, then in the long run 100% of value added would go to capital! Of course this does not mean that the productivity gains should directly translate into wages.

I think you have to look at the division of the added value by the changes in productivity. Were it something closer to 50-50 that might be reasonable, but so far as I can tell based on changes in wages over time, that's not the case at all.

Totally. I don't think there's anything wrong with saying "Gee, this store is making way more money but its employees are being paid the same, that sucks". I think indexing the minimum wage to inflation makes sense. I think a lot of low-skill jobs should be higher-paid, and I think raising the minimum wage is a good tool in some cases (although I think the people pushing for national increases often overlook the effect that a doubling wage will have in a rural area where the cost of labor really does impact the ability of a smaller store to stay open).

My point is just that I don't think "wages should keep pace with productivity" is true. If wages always rose with productivity, we'd be focusing all the gains on the people in the sectors where productivity is growing, and not lowering the cost of goods for everybody else.

The article argues that “the minimum wage should keep pace with productivity growth,” not “pay should keep pace with productivity gains.”

Suppose a business with a profit margin of 20% increases its revenue by 10% without increasing labour input. If the owner captures that 10%, the profit margin is now 27%. If the revenue is paid out as higher wages (“pay keeps pace with productivity gains”), the profit margin falls to 18%. If wages increase by 10% (“pay keeps pace with productivity growth”), the profit margin remains constant and profit can also increase by 10%.

What happens to the profit margin of individual businesses will vary. But across the entire economy, it’s reasonable to expect that the wage share will remain pretty constant, and until the 1980s, it did. https://en.wikipedia.org/wiki/Wage_share

  If nothing gets cheaper

Would anything need to get cheaper if everyone was making more money?

It depends on why productivity is increasing. Generally speaking, the employer is pushing productivity increases (implementing better processes like assembly lines, buying equipment that lets an employee do more, etc). If the employer is pushing the increases, they need some incentive to do that.

Often that incentive is making goods cheaper, so they're more competitive. That's a huge generalization, but it makes the point that there's nothing wrong with productivity gains outpacing wages.

If productivity doubles, and worker pay doubles, then the cut going to capital also doubles. Don’t see the problem with that. Your math is wrong.

But isn't this the cause of inequality? If you can't pay commensurate with productivity, a larger share of capital flows to capital owners and you stretch out the exponential curve. There are humans on the other side of the equation and there are other costs besides labor involved with operations.

There's a reason why common good capitalism is an increasingly attractive model for a lot of folks. A society cannot maintain the maximize returns to capital model indefinitely. I think many people are realizing that Friedman's economics either cannot be sustained or lead to a place where many would prefer not to go. People, and therefore the invisible hand, are inherently flawed.

The problem is all that extra value that workers have been generating the past 50 years is going into the pockets of the rich.

Presumably, it is possible for a product to also get better.

Yes, and product improvement is largely attributable to R&D, rather than assembly-line-level production. Those gains disproportionately flow to high skill white collar workers.