CanadaPolitics

The working class is supposed to get compensated fairly for increases in productivity.

The issue is that productivity gains aren’t equally distributed across the economy. A factory worker today is probably 100x more productive than a factory worker in the early 1900s. However, a hairdresser today has exactly the same productivity as one from a hundred years ago.

So it would stand to reason that the hairdresser should see no increase in pay at all due to no increase in productivity. Yet a haircut today costs a lot more than it did a century ago. Why is this? Because no one would work as a hairdresser today at century-ago wages. They would go work in a factory instead.

And so increases in productivity — even if they’re restricted to only one sector of the economy — cause inflation across the whole economy. This is called the Baumol Effect. This inflation means that a lot of the wage gains of the factory-worker get eaten up by the increased cost of haircuts, education, healthcare, and countless other goods and services.

It should also be noted that none of the productivity gains have led to an increase in the availability of land in desirable areas. When something is limited in supply but not demand it should be no surprise that the price goes up.