Over two days Betsey Stevenson had two posts on the nature of work – both of which I agree with, and both of which sound like they may contradict.
So wait a second, if someone in a high status job gets paid more for the same effort and same contribution then why are we talking about marginal revenue product? Shouldn’t they already be rewarded by status? Is this a product of power? Let’s have a think
Lets write the three elements here out:
- Work that is separated by “social standing”, and remunerated differently, may be similar in form.
- A labour market represented by the standard neoclassical model – which represents a tendency in markets where there is effective competition – wage is equal to the marginal revenue product.
- Wages do not represent the value of the individual within society, and may even differ from their value in employment.
Betsey uses these items as a way of making explicit that descriptive assumptions of a model should NOT be confused with broader normative assumptions. And that it is the role of someone using economics to, as far as possible, clearly separate these. Very true.
However, I think it also illustrates a general confusion about economics. Economists build models that explain tendencies, and the reason the tendency occurs – then when we understand the conditions within which these tendencies occur we can use these models as a framework to use real data, and in turn investigate whether these tendencies occur in the area of interest or not.
There are MANY other determinants of wage than marginal revenue product in many circumstances. But the neoclassical model has value in so far as it describes a tendency for the level of wages to move with marginal revenue product – and how it can be used to evaluate where the incidence of this falls given a variety of market structures.
An economist is never saying that a single incentive causes everything, or that a price or wage is the sole determinant of an action. It is evaluating the tendency for change in outcomes given an isolated change in an incentive – be it a price, wage, or some other attribute we are able to measure. Given that we can then use this framework to measure and understand our measurement.
That is pretty cool.