The Structure of Wages in Latin American Manufacturing Industries

By Jorge Salazar-Carrillo; Juan J. Buttari et al. | Go to book overview

Chapter 2. The basic conceptual and methodological framework

When examining quantitative results in later chapters, plausible explanations relying on fundamental concepts of marginal productivity wage theory and institutional factors will be frequently offered. Given the pioneering character of this study, the nature of the analytical comments should be made clear early in the work. These comments will be essentially interpretive and will often reflect educated conjecture relating to variables influencing the empirical findings. The lack of in-depth studies on specific labor markets (referred to in the previous chapter) makes a different approach not yet feasible.

In interpreting the quantitative results, three basic assumptions of marginal productivity theory will be employed: the rationality of employers and workers; the employer's desire to maximize net returns from factor inputs; and employees' aspiration to maximize the utility derived from their labor services. As is well known, from these assumptions the main principles of the theory are derived: (1) an employer will hire an extra unit of labor as long as the revenue from its marginal product is greater than or equal to its marginal cost; (2) an employee will provide additional labor services as long as the wage rate is greater than or equal to the marginal rate of substitution of income for leisure;1 (3) equilibrium will be reached when marginal revenue produced is equal to marginal labor cost and when the wage rate is equal to the income-leisure marginal substitution rate.

Likewise applied will be the knowledge that under the Robinson-Chamberlain conditions varying product and factor market combinations will produce diverse wage rates and employment levels. Once a framework of different combinations of product and factor market situations is established and different types of labor factors are specified, the presence of wage differentials follows by implication, even under equilibrium conditions.2

____________________
1
The marginal rate of substitution is the number of units of a good a person is willing to give up to obtain an additional unit of another good.
2
See Lloyd Reynolds, "Wage Differences in Local Labor Markets," "American Economic"

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