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

Here's why: Every time a company makes an improvement, a productivity improvement, it increases its value and its income. Whether it reduces a cost or adds value for which consumers will pay more, it increases 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 same amount for framing a house, but his productivity went up, so he gains (in effect) a half day's pay. Part of that gain helps pay for the new nailing gun, part goes toward other new tools, and part goes into his pocket since he's an employee and owner of the business.

In time, of course, all Phil's 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, Phil's productivity advantage increases the amount he earns as an employee and owner.

Productivity improvements don't 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, that's as simple as improvements in communication between two people who work together.

Probably the most important thing to know and remember about productivity improvements is that there are so many little ones. Sure, we all know 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 don't mean much, but collectively they've generated an enormous increase in our productivity.

Because of productivity improvements he made at work, Phil's real wages have gone up. Because of the millions of big and small improvements throughout society, just about everyone else's wages have gone up, too.