[OPE-L:4936] Re: determination of real wages

Duncan K. Foley (dkf2@columbia.edu)
Tue, 6 May 1997 10:50:15 -0700 (PDT)

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In reply to Ajit's OPE-L:4902:

>At 12:43 PM 4/25/97 -0700, Duncan Foley wrote:
>>It might help here to distinguish between the "real wage", that is, money
>>wages divided by an index of the prices of wage goods actually consumed by
>>workers, and the "product wage", money wages divided by the price of the
>>products firms produce. In a slump most product prices (especially in
>>non-wage goods industries) fall more sharply than money wages, so that the
>>"product wage" actually rises. This is the type of scenario I had in mind
>>in suggesting that high and rising wages drive technical change. I agree
>>with you on the importance of periods of crisis (either economy-wide or in
>>particular industries) in accelerating the competitive struggle and
>>technical change.
>This is an interesting idea. But I wonder how would it work? Let's suppose
>we can distinguish between wage goods and capital goods. In your scenerio if
>the real wages are falling, then the product wage in the wage good sector
>must be falling, and so their profit must be rising.

The markup must be rising, but the rate of profit might not be rising if
capacity utilization were sufficiently low.

>On the other hand, if
>the product wage in the capital good sector is rising, it would mean two
>things: the profit rate in the wage goods sector would be much higher than
>the profit rate in the capital good sector; secondly, the terms of trade
>between capital good and the wage good sector must change, worsening for the
>capital good sector vis-a-vis the wage goods sector. Do we have imperical
>evidence of this kind of changes?

I think the terms of trade effect is observable in cyclical data.

>Moreover, is it possible to distinguish
>capital good and wage good sectors neatly?

Well, it's done quite a bit. It's striking that the fall in real wages in
the U.S. since 1973 are not paralleled by a fall in the product wage, which
suggests a terms of trade effect. One big sector is medical care, which is
a wage good, and the price of which has been rising relative to everything
else during this period.

>And what about the reswitching
>kind of problems? Could that arise here?

In theory yes, though at business cycle frequencies there might not be
enough time for capitalists to re-organize production around an alternative


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu