Question about Wage Theory

Economics Economics Questions
1

I listened to a recorded speech some time ago that explained wages in terms of the cost of value provided by the laborer. The case was made that a laborer who makes $10 an hour provides $10 of value to the company per hour, which the company turns around and sells. This seems to be an objective marginal value theory of wages, and places the employer in the position of the Economizing Man that Austrians so rightly critisize the classical economists for.

It seems to me both more likely, and more in accordance with Austrian theory, to explain the price of labor in the same way we explain the price of any other good, in terms of subjective marginal utility, and subject to Supply and Demand. The employer desires laborers because his OWN labor has disutility to him, and he wants someone else to do the work. He goes on the market for laborers and bids against other employers for those laborers whose minimum skill set he desires. If the net cost of aquiring the laborer is lower than the difference between his added value and his gross cost of employment, then he will probably want to keep him, otherwise probably not. Austrian theory says that, in any exchange, both must see themselves as winners. The employer wants the kid because he can use his time to make money, and the kid wants the job because he values whatever the salary is more than his time. While it is true that other employers can bid away employees, this is not a process we see in other prices. The amount buyers and sellers value an egg is marginal and subjective, but the PRICE of an egg is an aggregate of these groups bidding with each other until the market clears – each egg is not individually auctioned off one at a time. If eggs WERE auctioned in such a manner, the theory that was described to me in the lecture may seem closer to the truth.

So, subjective marginal utility seems to be a superior understanding because it explains why a kid can make $10 an hour while providing $300/hr NET value, and it also explains why an employer will hire his lazy nephew who provides little or no value to the company (because it keeps him on good terms with his sister, possibly).

Am I TOTALLY missing something here?

Thanks,

Bo

2

Hm, I’m not sure. As far as I can tell, the Austrian theory for any factor of production is that it will be employed iff its marginal revenue product exceeds the cost of employing it. The usual way of referring to the contribution of a factor in neoclassical theory is to refer directly to the marginal product, rather than the value of the marginal product, something Rothbard highlights in MES. Competition amongst employers will insure that a worker’s wage is more or less the same as their MRP. I haven’t gotten to the section on wage formation yet though, so I can’t describe it in much more detail than this.

-Jon

3

I, like Bo, smell a rat in wage theory.

I have a job where my marginal product is wildly higher than my wage. I’ve seen the numbers. I’m assuming that this condition persists throughout the industry.

The discrepancy is too large to ignore. I feel like some of wage theory is essentially a muzzle on wage earners, assuming that whatever the employer deigns to offer, is somehow just good enough, since the employer is the REAL genius here. I work for a company that does everything half-ass. I’m not feeling the brilliance in the upper echelons.

That isn’t to argue for unions or anything like that. There has to be a better explanation for labor prices than what is currently and nonchalantly pooped out.

4

Good point.

The answer is supply. A competitor could steal you away with a higher salary, but he doesn’t have to because he can hire another person at a lower rate.

5

You are heading in a wrong direction i think :slight_smile:

There is no connection between the product your employer sells and the wage you earn. It is the old fallacy of the internal value of labor as such. But there is no such thing. If you like to be compensated on the high selling prices for the products you put your labor into, than why not ask for a percentage of sales? That way you could participate. But you have not agreed on your job offer on these terms, but because, as the decision you made showed , you valued the wages payed to you higher than not getting that employment.

In a free market economy, the customer is the one that decides what price is set. Now, from a laborers perspective, his customer is called employer, just because we decided to name a specific customer that way.

There is also nothing like a special labor price other than there is a specific grocery price. Prices do not come from a price tag, but are the result of a voluntary transaction.

As the product a business sells is not worth what the business thinks it is, but what the customer is willing to pay for, so your service as a laborer is not worth what you believe it is, but what your customer is willing to pay for.

If you feel you are not getting a price that is acceptable to you, you can simply not enter into the deal. If noone else, or not enough others, are willing to sell their services for the price the customer(employer) wants to pay, the customer will get no service at all, so where is the problem? Businessmen want to, as everybody else, maximize their profits. The way to do that is to look for the best price for a product. Like you would rather buy, say a CD at Wal-Mart for 2,99 than to buy the same CD from your old fashioned CD Store on main street for 9,99.

The value is not in the product itself, but in the subjective value it has for the seller and buyer. No rats involved. Prices rise or fall because of 2 reasons, scarcity/supply and demand. And, most important, a price becomes a price only after a deal is accepted and payed for, not by merely stating an offer to sell at a specific amount of money or whatever.

Basically if I put a label on a shirt in my business, saying %15,98 this is not the price, it is just an offer to sell it at that price. The price becomes reality after a customer bought the shirt at that price, I have the money in my pocket and he/she has the shirt in her/his bag.

6

How do you calculate your MRP? I think the wage theory pertains to the value of the MRP, not MRP itself. It isn’t the LTV.

-Jon

7

I knew plenty of that already. The refresher was nice!

I didn’t smell a rat in accepting the job, or in hiring practices, or in them maximizing profits or anything like that. I’m just suspect of the idea that a wage is determined by the workers’ marginal value, when it’s clearly not. I like your explanation better.

I’ve thought that they should pay commission, in order to keep their most profitable people. You often find unqualified people just barely making it, where they would probably be more useful elsewhere.

Part of this industry is in retail, and I doubt that they would ever offer commission, because it would be very difficult to track.

8

Supply and demand for labor is marginal revenue product.

Demand for labor can only fall if demand for products fall as well. If demand for products falls, then your MRP is lowered since the products are worth less and less. Having wage restricting laws (i.e. minimum wages, unions) prevents wages from falling appropriately and causes unemployment. On the other hand, when demand for goods rises, MRP is higher and the demand for labor rises as well.

The only objection to the idea of MRP I have is the notion that the amount an employer pays you is the value of the final products you produce and thus the businessman gets zero profits. This is entirely a neoclassical conept of “perfect competition” where profits in the long run are zero. It’s obvious that your employer sells the product you made for more to make a profit.

9

Wasn’t up to educate with a pointing finger :-).

Is it possible that you have a different point of view about what marginal value means? I ask this, because marginal value is exactly how a price is accepted. The marginal value is nothing general, like an interest rate or a temperature in physics. The marginal value is bound to individuals in a specific time. The marginal value, i.e. the price someone is willing to pay for a specific item (hence that labor itself is not an item, whereas 2 hours of labor is) depends on how much of the item one already has and how the individual is evaluating what he already has compared to what he thinks he needs to achieve his goal. The more of a “usable” item someone posses, the less is the value each item has for him, in case he loses it. In terms of labor, if an employer has 100 clerks, doing all the same job, and only 5 bookkeepers (ok that is a bad example, because personally i would like to get rid of the bean counters alltogether [:P] at times) the marginal value of a single clerk is less than that of one bookkeeper. So, If he looses one clerk and wants to replace him, his willingness to pay a price he perceives as high is lower than if he had to replace a bookkeeper. However, keep in mind, this does not mean that he will not hire a new clerk for a perceived high price anyway, maybe there are not much clerks on the market right now, but lots of bookkeepers. It is a total individual and ordinal place we call marginal value.

And last not least, marginal value has nothing to do with the value of the clerk or the bookkeeper as a human being, only as a means in providing a function/service/product to achieve goals.

If you are a soccer trainer you need 11 players, so the marginal value of each player you have above those eleven is decreasing. Unless, things change and you loose a player, than the marginal value of the players above 11 increase again. Marginal value is individual and bound to a specific time.

10

The way it seems, is that customers of labor would essentially value all labor services at nothing or less, if they could (which is fine). That means that there is some mechanism preventing them from doing so. That mechanism might be that the seller wouldn’t accept that price. There is also a mechanism from the wage being higher than whatever average exists in whatever given industry. The presence of averages is either due to collusion (unlikely) or other market forces. I guess those forces are available supply of that type of labor.

I was equating the product I was selling as the basis for the marginal product, and I guess that was a fallacy. As salespeople, it would be better to have commission.

I was thinking that I was earning say $15 an hour, but both selling and producing a product that after all costs, has a profit margin of say 70%. The labor cost may be $30. The product may sell for $1000. The company may keep $700. That’s an enormous margin. That was the basis of what i thought MRP meant.

If the phenomenon was truly individual, we wouldn’t mention bookkeepers as interchangeable, as it seems to have been said. One bookkeeper might be more productive, because he is a better bookkeeper than his co-workers. He might be more productive than 2 more bookkeeper ‘units’.

11

I think it’d help if you gave Chapter 2 of Rothbard’s Man, Economy and State a read, where he gives an explanation of the fundamentals of direct exchange.

-Jon

12

In a true free market, “wages” and “value of worked performed” would converge. In the present, there’s a huge State distortion of the market.

A worker can’t normally say “My employer is ripping me off! I’ll start my own business!” Regulations restrict competition and hurt small businesses. Raising capital is hard for individuals. Taxes drain the productivity of individuals and the proceeds are used for corporate welfare.

Capital is entitled to its fair share of profits. However, restriction of the market means that capital claims more than its fair share of profit.

13

Corporations give each other huge discounts on capital, based on economies of scale, as well. So a startup would have to pay premiums for capital, as well as wrangle with the state for the “privilege” of competing. Also, a corporation can absorb a bad sale, for instance, if the customer is unsatisfied for some reason. A startup could be ruined the first time that occurred.

Some industries are relatively new and the state hasn’t caught up yet. An in-house tech negotiated with the company for higher wages, else he’d leave and bring all the tech customers with him. The company refused, and the tech did just what he said. The company lost hundreds of thousands in sales, since the customers weren’t loyal to the company, but to the tech personally. The state didn’t hassle him with unnecessary red-tape. I congratulate the tech for his success! There are a few areas where this is still possible, but not many.

14

The tech industry is one of the few loosely regulated areas. This means that most intelligent people without political connections are attracted this area.

However, this also means tech is fiercely competitive. There are a lot of intelligent people with no other venue for competitive economic activity. It might be more profitable to focus on busting heavily regulated industries instead of fighting a huge crowd in software engineering.

15

Oh, I love the arrogance of the code monkeys.

No offence intended, it just amuses me to no end.