Chris Dillow on income inequality and productivity growth

money.jpgChris Dillow from Stumbling and Mumbling has a very interesing post on productvity and wages drawing upon a paper by Gilles Saint-Paul.

Essentially the points in Chris' post can be used as sources for very interesting discussions amongst business marketeers and economist alike.

"The key feature of his model (model by Saint Paul) is bounded utility - the notion that our needs are limited, and indeed satisfied. When this is the case, productivity growth reduces wages, in two ways.

First, if our needs for a good are satisfied, we won't buy much more of it as prices fall. The upshot is that rising output per worker will lead to fewer workers - as has happened in agriculture.

Second, if we live in a world of abundance, we'll become less sensitive to higher prices, because higher prices don't much reduce our ability to buy other things we need; think of footballers' wives buying high-margin designer clothes. As price-insensitivity rises, so does monopoly power. So firms' mark-ups over wages rise and real wages fall."

As I said above we have here the entrance to some very interesting topics ... what are the implications for price and income elasticities if the notion of bounded utility holds true or more specifically the underlying dymanics determining price sensitivity? In a business context we could also ponder the crucial ability to create needs and wants ... we need to create new wants for existing needs or the other way around?

Well as you can see my noodle is perhaps overcooking on this one, but it s definitely worht a look!