Increased productivity means many people like Jane and Phil earn effectively higher wages than their parents.

Heres why: Every time a company makes an improvement, a productivity improvement, it adds its assessment of value and its income. Whether it reduces a cost or enhances assessment of value for which consumers will pay more, it adds its earnings.

Some of those increased earnings go to higher (real) wages for employees, some goes to investors, and some goes back into improving the business. When we say real wages, we mean after inflation.

Consider this: Phil, a carpenter who builds homes, buys a new, compressed-air nailing gun, and now frames a house in 18 and a half days, rather than 19 days as he did with his old nailing gun. He still gets paid the identical amount for framing a house, but his productivity went up, so he gains (in effect) a half days pay. Part of that acquire helps pay for the new nailing gun, part goes toward other new tools, and part goes into his pocket since hes an employee and owner of the business.

In measure , of course, all Phils competitors will close this productivity gap by getting new nailing guns of their own, and that will push down the price that homeowners pay for framing. But, for now, Phils productivity advantage enhances the amount he earns as an employee and owner.

Productivity improvements do not come only from better technology, like better nailing guns. They also come from improvements in processes that allow employees to work more effectively. In many cases, thats as simple as improvements in communication between two all the people who work together.

Probably the most important thing to understand and remember about productivity improvements is that there are so many little ones. Sure, we all understand about the big breakthroughs like electric lighting, the automobile, and the computer (well, some of us might argue about that)), but just as important, or perhaps even more important, are the literally millions of small improvements made every year. Individually, they dont mean much, but collectively theyve generated an enormous increase in our productivity.

Because of productivity improvements he made at work, Phils real wages have gone up. Because of the millions of big and small improvements throughout society, just about every one elses wages have gone up, too.

Robert F. Abbott is the author of the forthcoming book, Ownership Revolution: How Working People are Buying Up Big Business, from which this article comes. If you contribute to a pension fund, mutual fund, or whole life insurance policy, youre likely one of the new owners of the big corporations. Find out more at http://www.TheNewOwners.com .