Econ 248, UW-Milwaukee Basics of Work and Wages in the Political Economy Model Econ 248: Economics of Poverty and Discrimination Prof. Keith Bender

Econ 248, UW-Milwaukee

Basics of Work and Wages in the Political Economy Model

Econ 248: Economics of Poverty and Discrimination

Prof. Keith Bender


Overview

• As you will learn in the NC model – work and wages are based on individual decision making of firms and (potential) workers. Key issues are productivity and derived demand.

• PE model (in general) thinks that this only happens rarely.

• The Four C’s are important– Context: Capitalism is relatively recent (and is constantly

changing)– Conflicting Interests: Capitalists ‘exploiting’ workers– Collective Action: Importance of unions and other workers

groups vs collective action by employers– Change: business cycles, new legislation, changing work

systems


Outline

• Wage Determination– Labor Theory of Value (Marx)– Customs and Institutions (Modern)– Extensions

• Unemployment and Macroeconomic forces

• How workers are motivated to work• Explaining differences in wages without

discrimination


Economics is commonly called…

the

dism

al s

cien

ce.

fun

and e

xciti

ng!!!!

the

soci

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cien

ce th

..

the

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f the

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19%

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75%

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1. the dismal science.

2. fun and exciting!!!!

3. the social science that money built.

4. the science of the composition, structure, properties, and reactions of matter, especially of atomic and molecular systems.


Wage Determination – A bit of history/context

• Let’s tell a story– Adam Smith, 1776, wrote, An Inquiry into the

Nature and Causes of the Wealth of Nations– One of the debates of the time (Smith-David Ricardo-

Thomas Malthus) was about economic growth and the well-being of people – how high could it go?

– The movement from an agrarian to (early) industrial society implied that it could not go any higher than the ‘subsistence wage’

• Problem was that there were too many workers – they keep reproducing so the standard of living would never increase

• Therefore the ‘dismal science’ was born


Wage Determination:The Labor Theory of Value

• So move forward another 50 or so years to Karl Marx and Friedrich Engels

– Concerned about:1. Workers earning subsistence level wages.

2. Capitalists taking everything above this.

– So if the extra (aka ‘surplus’) was more equally distributed, then workers would have wages above subsistence level wages

• Conflict key here• (Advocated overthrow of capitalism, but that is a

discussion for another course).


Labor Theory of Value con’d

• So how did Marx visualize this?• Key is the Labor Theory of Value

– Definition: commodities are worth the total amount of labor that is required to make them

– Implies: equivalence in time of production should trade equally– Ex: one hour of economics lecture=one hour of snow removal

• Why is this a problem? Because labor is an unusual commodity.– Cannot be consumed or traded (except in sports!)– Typically can pay only for time spent in labor (‘labor power’) not

productivity (‘labor’)– And wage is often set at a ‘customary’ level– All of this means that wages may not have anything to do with

productivity or the price of the good (as in the NC case).


Labor Theory of Value (still) con’d• So where does the exploitation come from?

– The differential between labor (productivity) and labor power (time)– That is, where the customary wage is relative to these determines the

surplus that goes to capitalists– The diagram below shows an example

• Line AC represents total productivity• Customary Wage is set at W• So AW becomes the payment to workers (Labor Power)• DC is the payment for other factors of production• And WD is the surplus (that goes to capitalists)

A C

Total Productivity (‘Labor’)

W

Labor Power Surplus

D

Payment to other factors

Labor Theory of Value (still, still) con’d• So where does the exploitation come from?

– If there is a movement in the customary wage, the surplus moves too – So if the customary wage falls, there is more surplus available for

capitalists– If the customary wage increases, there is less surplus available for

capitalists– In the extreme, Marx said that workers should get all the surplus (since

they generate all the labor productivity)

A C

Total Productivity (‘Labor’)

W

Labor Power More Surplus

Labor Power Surplus


But that is all in the past. What do you think really impacts wages now (as a political economist of course!)?

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Unet

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Fair

ness

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ettin

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arket

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– beli

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hat M

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...

19%

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1. Productivity

2. Government

3. Unethical companies

4. Fairness

5. Strategic behavior by firms

6. Customary wage setting

7. The market

8. Trade Unions

9. None – believe that Marx had it right with the LTV!


Modern Political Economy Theory

• Don’t believe in Labor Theory of Value anymore• Much more general – role of customs and

institutions– Unions– Government– Fairness (Rees quote on p. 153)– Rigidity in firm wage structures – Job Evaluation scales– ‘Divide-and-conquer’

• Key is that all affect the ‘customary wage’– (which is generally above subsistence level now)


Extension 1: Example of Institutional Influence on Wage

• (Customary) Standard of living– Wages– Government provided goods and services, eg. Welfare = ‘Social

Wage’

• Key to PE theory is that they are linked. Assuming that the Customary SoL is fixed,– If social wage goes up (eg. Universal health care), then wages

can go down.– If social wage goes down (eg. Social Security going bankrupt),

then upward pressure on wages.

• Although assumes SoL is fixed. If it is going up, then not quite as clear relationship (eg. Welfare may increase with no immediate change in wages)


Extension 2: Example of Custom on the Wage

• 20th Century saw the institution of the ‘Family Wage’– Def: Wages/earnings are dependent on family

structure and size– Idea that in typical family of husband, wife and

2.4 kids, the husband can work and support all 4.4 people (!) in the household.

– AKA ‘Family supporting jobs’– Not clear where it came from – likely the union

movement.


Example of Custom on the Wage con’d• Two further points

– Family wage could be adjusted if wife provided some work at home (eg fixing a packed lunch, childcare, etc = household production)

• Partial exploitation of wife by firm• Called ‘Jobs with Wives’ – a job paying a family wage and placing

extensive demands on the nonwage spouse (wife!)– Family Wage has declined since 1960s

• Corresponds with an increase in female labor force participation (from 34.7% in 1952 to 59.4% in 2006)

• Causation is not clear• On the one hand – increases in women entering the labor force

means that firms do not need to pay as high of a family wage (otherwise paying double!)

• On the other – women may be moving into the labor force because the family wage has decreased (causation running other direction)


PE Theory and Unemployment

• Neoclassical views of unemployment – Some unemployment is efficient (frictional,

seasonal, structural (?))– Some is inefficient (cyclical) – mostly

because of ‘sticky wages’

• PE theory takes a different view – namely that capitalists need unemployment to exploit workers


To give a sense of this… You remember hearing a report that unemployment is at 4 percent (the frictional unemployment rate) and

you decide this is a good time to ask your boss for a raise. He says,

“Darn, theunemployment rate is low.

I can’t findanyone towork, and Idon’t want

you to leave.

“Hah – araise. You’reFIRED!” Yousay, “Thank

you, Mr.Trump,” andimmediatelyfind another

“Get out ofmy office,

you bum! Noraises

today!”

0% 0%0%

1. “Darn, the unemployment rate is low. I can’t find anyone to work, and I don’t want you to leave. Take an extra $5 per hour.”

2. “Hah – a raise. You’re FIRED!” You say, “Thank you, Mr. Trump,” and immediately find another job at the same wage. (Meaning that you are no worse off.)

3. “Get out of my office, you bum! No raises today!”


You get the raise. So, you decide to go next month to try again. You enter the boss’s office where he is reading about the dramatic increase in unemployment from 4 to 10%. Meanwhile you see a mass of people outside the factory gate out of your boss’s window. You sheepishly ask for a raise. The boss says,

“Yes,pleasehave

another$5 perhour.”

“Timesare

tough, noraises

today!”

“No – infact, I amputtingyou onunpaid

overtime!”

“No – infact, I amputtingyou onunpaid

overtimeand

cutting

0% 0%0%0%

1. “Yes, please have another $5 per hour.”

2. “Times are tough, no raises today!”

3. “No – in fact, I am putting you on unpaid overtime!”

4. “No – in fact, I am putting you on unpaid overtime and cutting your wage by 40%!”


PE Theory and Unemployment con’d

• Seen in 3 ways1. Cost of Losing Job (Marx)

• Capitalists know that if labor markets are ‘tight’ (no unemployment), a fired worker can find a job easily

• However, when there is unemployment, workers have more difficulty in finding work and keep from being fired– Work harder or take lower wages (increases surplus)

2. Ideology of Unemployment• Because of this, workers want gov’t to have full employment policies• Capitalists counter with idea that most unemployment is ‘voluntary’ (an

implication of the NC model) and, therefore, not fixable by government• Unemployment is avoided by workers working hard and not asking for

more money!3. Business Cycle

• Needed to limit wage demands by workers by threats of future unemployment


How to get workers to work harder

1. Increase the cost of job loss– High unemployment and low benefits– Offer higher than market wages (efficiency

wages)– Increase monitoring by supervisors– Choose workers with dependents (variant on

‘Jobs with Wives’)


How to get workers to work harder con’d

2. Control the ‘Labor Process’– Definition: methods by which work and workers are controlled

or how workplace is structured to assure that workers work– 3 methodologies of ‘supervision’ or labor control

1. Simple Control:• Def: direct supervision of output by manager• Threats, not incentives, ‘motivate’ workers

2. Technical Control:• Def: physical capital/production process controls rate of production• Somewhat higher skilled workers, mixture of threats and incentives

3. Bureaucratic Control: • Def: high level service and technical jobs where it is hard to measure

individual productivity• High skill and high pay• Motivate through incentives, eg. Career ladders


How to get workers to work harder con’d

2. Controlling the ‘Labor Process’ con’d– Problems/complications

• Collective bargaining/government• Capitalists still controlling labor process?• Mutuality of interests/HRM


Wage Differentials in the PE Model

• Like in NC model, there are theoretical reasons to think that differences in wages exist that are not discrimination

• Customs and Institutions• Labor Segmentation

– Def: bundling of firm, job and worker characteristics that limits worker opportunities and divides workforce

• Type of ‘Divide-and-conquer’ technique

– Key is that there are different qualities of jobs – bad, intermediate and good


Example of Labor Segmentation (UPF p. 170)

• Interestingly, NC theory would have the same categories• Key difference is that PE model assumes NO movement

between groups. NC model says that movement is possible


Comprehension Question 1: Political Economists believe that capitalists like hiring workers with dependents because

0% 0% 0%0%0%

1. this group is less likely to be unemployed.

2. they are more productive than single people.

3. they are more likely to work in the secondary sector.

4. these workers have a built in high cost of job loss.

5. it generates a type of exclusion from which they can generate more societal surplus.


Comprehension Question 2: An example of the PE concept of ‘Divide-and-Conquer’ is

0% 0% 0%0%0%0%

1. a minimum wage.

2. unemployment benefits.

3. collective bargaining.

4. ‘Jobs with Wives’.

5. labor market segmentation.

6. ideology of unemployment.


Questions for me?

Next Lecture:

Discrimination in the PE Model

Documents

Econ 248, UW-Milwaukee Basics of Work and Wages in the Political Economy Model Econ 248: Economics of Poverty and Discrimination Prof. Keith Bender