[sheyboer]

Dr. Herbener,

If prices are determined by the laws of supply and demand, and wages are just a term for the price of labor, then how does a worker’s increased productivity (say at a factory where the worker is unskilled but now has better tools thus increasing his productivity) raise his wage assuming nothing has changed with the supply and demand for labor? If the answer is that his real wages increase because there are now more goods produced relative to his wage, i understand; but, what about those Multinational Corporations who hire workers for their sweatshops and take all the produced goods out of the local economy to sell in American retail stores? Will increased worker productivity in sweatshops in the Developing World really raise their wages if the produced goods are removed from their local economy?

Thanks for your time.

[jmherbener]

A worker who produces more will generate more revenue for the entrepreneur when the additional output his greater productivity generates is sold. Because of the greater revenue to be earned, the entrepreneur will pay more for such labor. In other words, entrepreneurs’ demand for more productive labor will be greater than their demand for less productive labor.

It doesn’t matter where the entrepreneurs’ sell the output produced by labor. What they’re willing to pay for labor depends on the revenue generated by customers who buy their output, wherever they might reside. If diary products produced in rural Pennsylvania are sold to consumers in NYC, diary workers receive higher wages than if they had to sell to their neighbors locally. Dairy workers then realize their higher real wage by purchasing products produced by other workers in other places.

Take a look at the work of Ben Powell on sweatshops:

http://econlib.org/library/Columns/y2008/Powellsweatshops.html

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