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Are workers paid their marginal product? Evidence from a low wage labour market

By Stephen Machin, Alan Manning and Stephen Woodland


Because of labour market frictions, the supply of labour to a firm does not fall instantaneously to zero if an employer cuts wages. This gives employers some monopsony power. In the absence of trade unions, minimum wages and efficiency wage considerations a profit-maximising employer will set a wage below the marginal revenue product of labour so that workers are, to use the terminology of Hicks and Pigou, exploited. This paper presents a method for computing the rate of exploitation. This method is then applied to a unique data set on workers in residential homes for the elderly on England''s sunshine coast. We conclude that, on average, firms pay workers about 15% less than their marginal product

Topics: H Social Sciences (General), HB Economic Theory, HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 1994
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Provided by: LSE Research Online
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