In economics, there is a
considerable interest and natural one at that about the wages. There is a
question about the ideal wages that an employee would secure. Karl Marx had
posited that the labour produce the goods yet it is the capitalists who appropriate
all the profit. In Marx’s words, if a shoe were to cost to produce $1 and a
labour produces four shoes in an hour, he would have produced the output
equivalent to $4. Yet while the capitalist would gain a revenue of $4, he would
at best let’s say given $1 to the labour. Assuming the fixed costs and
non-labour costs to be $1, the capitalist still makes a profit of $2. This in
the long run would lead to income disparities and become a cause for the
revolution. The Marxian theory was later criticized on the grounds of human
capital theory. In the past, the posts have sought to link for instance Smiley
Curve with the Marxian propositions. Marx did face a challenge from what was
emergent as the neo-classical theory. The neo-classicalists were essentially in
favor of the pro-market models that were sought to be favored by their
classicalist predecessors. One of the neo-classicalists who talked about wages
and contribution of labour was John Bates Clark.
Clark viewed the contribution in
terms of the marginal productivity of the workers. He argued that the workers
gained equivalent to their marginal contribution to the output. Marx had argued
that the labour got far less than their contribution with the profits being
skewed towards the capital. Clark believed that the workers would revolt if
there were to disparities in their contribution to the output and the returns
they generated from that output. In other words if there were differentials
between the output and the returns, there would be conditions conducive for the
Marxian revolution. Clark however argued that each labour got the same wages
relative to the contribution they had made to the production of the output. In other
words, the income differentials could be explained by the productivity differentials.
The productivity differentials were later sought to be explained as suggested
above by the human capital theory. According to this, greater the knowledge
essential for production or conception of the output, the greater would be
output.
The marginal theory of productivity and
its variants explain best the Chinese paradox. China was the factory of the
world. Almost every major brand had outsourced their manufacturing to China. Yet,
the Chinese labour were earning very less. For an iPod which might cost $200,
the labour who produced it or rather assembled it got a few cents for his or
her work. This would go against the heart of labour centric production. In fact
management theories centered their propositions on the linearity of the value
chain with manufacturing adding the maximum value. Yet even when one considered
the entrepreneur who actually took the task to assemble too secured hardly a
dollar or two in the overall share. This led to the development of non-linear
models of value addition and value capture some of which have been described in
the previous posts.
The critics however contend the
position of Clark to be more ideological rather than grounded in any theory or
empirical fact. Their assertions are bolstered by the fact that Clark emphasized
that the workers would revolt if they perceived to be receiving something less
than what deserved. This is little farfetched though the contours of the
argument remain strong. There was no doubt that Clark among other
neo-classicalists would seek to downplay Marxian models and emphasize their own
findings. The findings were without doubt rooted in ideological analysis rather
than an examination of empirical evidence. It is a different matter the
economists sought to prove their thesis through an analysis of income as
explaining productivity differentials causing changes in income. This to the critics
looked as a sleight of hand. The explanation was rooted in the financial
statements which would show the actuals rather than any evidence of workers
getting compensated as per their contribution. The financial statements do not
sit in value judgments is something well known.
The critics contend that
productivity differentials do not explain income differentials since the output
produced is heterogeneous. One of the contentions is a farmer and singer cannot
be compared. For instance while a farmer produces an output that is tangible,
the singer’s output is something intangible. It might be the tangibility or
otherwise that results in different levels of utility to the consumers of the
goods and their disposition to pay differs. While it makes sense, there is also
a question of income distribution within the production chain. There exists a
question of whether the labourer who actually manufactured or assembled the
good deserves higher compensation or the compensation be higher for one conceptualized
the product. The linearity argument begins with an assertion that the value
addition increases with each step and hence the workers who are bringing the
same into the market must be compensated more. The non-linear argument would
revolve around the fact that without conceptualization, the work would never
have taken birth. Once the formula is known, it would be relatively easier to
produce the good and thus the marginal contribution of each unit of human
capital skilled or unskilled would differ thus necessitating the compensation
differentials.
Without doubt, these productivity
differentials cannot be easily explained. For instance, the street performers
might gain only a pittance while their tasks might appear difficult while some
others might gain good money though their tasks appear mundane. It might also
be due to the differentials in the needs of the people who are availing their
services. The critics contend from the supply perspective if one might call it the
differentials are not linked to the marginal contribution or the needs are heterogeneous.
There does exist a demand side too. It is the nature of demand that perhaps
matters to the willingness to pay. At the heart of the same, is the willingness
to pay and this is determined by the utility the good or service offers to the consumers.
At the same time, it is the willingness to pay on the part of the employer to
the employee that determines their wages. The employees have a right of refusal
yet in a market where supply exceeds demand, it would be all but impossible to
exercise this right. Therefore, any analysis on marginal productivity theory and
other similar models must incorporate
the willingness to pay and the ability to refuse or otherwise that determines the
quantum of wages.
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