Pigouvian Exploitation of Labor

Abstract

T HE concept of exploitation, while primarily associated with Marxian economics, has a long if somewhat neglected history within the neoclassical tradition. Pigou and other neoclassicists concerned with the welfare implications of their theory found it natural to define exploitation of labor as the difference between labor's marginal product and its real wage.' Whether or not the normative connotation of the term, exploitation, is deserved, the Pigouvian definition opens important questions for positive economics. In particular, the level of exploitation can be interpreted as a measure of the relative bargaining power of labor and employers in an imperfect market economy. In this context, Pigouvian exploitation provides a useful way of introducing and testing many of the interesting insights of bargaining theory in a more rigorous framework.2 Despite its theoretical importance, Pigouvian exploitation has received little empirical attention.3 However, the development of reliable data and econometric tools for estimating production functions has made the quantification of the concept quite feasible. While most studies of production have been oriented toward questions of growth, technological change and input substitution, there is no reason why these same techniques cannot be used for exploring theories of the income distribution and exploitation. Indeed, two recent research efforts, those of Thurow, and Hildebrand and Liu, have derived marginal products from the partial derivatives of empirically estimated production functions.4 While the first of these studies is based on time series data for the entire United States economy and the second on cross-sectional data for manufacturing industries, both suggest that labor is paid substantially less than its marginal product.5 Given the existence of Pigouvian exploitation, the natural question is what factors determine its extent. The purpose of this paper is to explore this question at both the macro and micro levels. Specifically, we concentrate on testing several well-known (if somewhat intuitive) arguments drawn from labor economics. The emphasis on the level of exploitation, rather than on the real wage rate, allows for the supposition that in a market economy, wages are limited by marginal productivity. Hopefully this effort will demonstrate the importance and feasibility of research concerning Pigouvian exploitation. Received for publication December 18, 1972. Revision accepted for publication May 28, 1973. * We would like to thank the referee and our colleagues of the Department of Economics, University of Alabama in Birmingham for many helpful comments. 1A. C. Pigou, (1952) pp. 555-560 and pp. 883-884. To be sure, this definition has been subject to a good deal of criticism on the grounds that such a divergence may not be a deliberate result of employer actions. For a discussion of this minor controversy see A. M. Cartter (1959), pp. 6570. Moreover Pigou, himself, was careful to distinguish the level of exploitation from the level of unfairness, i.e., the divergence between factor payments and marginal productivities which would hold in a perfectly competitive economy in equilibrium. 2 The authors feel that the normative interpretation of exploitation is important. The common content of principles courses and the long standing interest in refuting the distributional implications of the labor theory of value, belie the pure positivist position. For perhaps the strongest normative statement concerning marginalist analysis see John Bates Clark (1899). For a statement of the more widespread positive approach see Schumpeter (1954), pp. 868870 and pp. 883-884. 3 This lack of attention is probably due to the fact that marginal productivity, unlike the average labor productivity of Marxian economics, eludes easy quantification. Indeed, some neoclassicists may have regarded the Pigouvian definition as desirable precisely because of these difficulties. 4 Lester Thurow, (1968), G. H. Hildebrand and T. C. Liu (1965). Both Thurow and Hildebrand and Liu used variants of the Cobb-Douglas production function estimated directly from data concerning labor and capital. Thus, they avoid the generally indefensible approach which uses wage data to estimate production functions on the assumption that marginal products are equated to wage rates by an invisible hand. 5 Thurow finds that the rate of Pigouvian exploitation, defined as the ratio of marginal product to wage rate, has fallen from about 177% in 1930 to about 159% in 1965, although the rate of decline has been sporadic. Hildebrand and Liu compute rates of exploitation of production workers to vary between 171% in the stone, clay and glass industries and 87% in the transportation equipment industry. The la ter is the only industry with a rate of exploitation below 100%. It should be noted that Hildebrand and Liu also found substantially higher rates of exploitation among nonproduction workers.