Friday, June 21, 2013

Complementarity and Substitutability between Labor and Capital

A nice commentary on the CBO's scoring of the upcoming Comprehensive Immigration Bill.

Some thoughts:
1. Instinctively, labor and capital are thought to be substitutes, but in practice they have a large complementary dimension between them as well. A man with a bulldozer can put several men with shovels out of business, but the bulldozer driver can command higher wages because his labor is more productive when supported by a capital investment.

2. There is more overlap between complementary and substitutability than you might think. For example: albums and live concerts.

3. The impact of capital on different forms of labor may vary. Labor is heteregenous, and skilled labor is likely to increase in productivity more than unskilled labor. But think of manufacturing before trade -- did that really benefit the manager and the capitalist more than the unskilled labor at the line?

4. Total Factor Productivity is the secret sauce that makes an economy accelerate above and beyond countable labor and capital increases. I understand why the CBO scored it as it did, but I don't think it will reflect reality.

5. It is uncontroversial to note that, in a low aggregate demand environment, increasing unskilled labor will put additional pressure on wages at the low end, worsening the lot of unskilled labor that is already here. Other complementary elements of the economy may benefit from lower unskilled labor costs.

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