Academic journal article Atlantic Economic Journal

Do High Profits Imply Low Wages?

Academic journal article Atlantic Economic Journal

Do High Profits Imply Low Wages?

Article excerpt

I. Introduction

An abundance of evidence has been presented over the years in support of the proposition that wages vary inversely with employer monopsony (oligopsony) power in labor markets [Landon, 1970; Landon and Baird, 1971; Hurd, 1973; Link and Landon, 1975; Stratton, 1985]. The neoclassical theory of labor exploitation does indeed predict a net inverse relationship between the level of wages and the degree of monopsony of a particular employer, as monopsony power (exploitation) is measured by the elasticity of the supply of labor to the employer, when perfectly competitive conditions prevail in product markets. Nevertheless, assuming no discrimination, the wages paid by a neoclassical exploiter of labor is higher than those paid in all of the alternative employments of its employees except in the alternative employment of the marginal worker.(1)

The important theoretical and empirical question is, however, whether or not wages are lower in the real world than they would be otherwise as a consequence of the existence of monopsonies. A necessary condition for wages to be higher under monopsony than they actually are is that the monopsonistic firms experience economic profits. Neoclassical exploitation which is accompanied by economic profits will be called here pure neoclassical exploitation.

Pure neoclassical exploitation may be experienced by the workers of an otherwise marginal firm under long-run perfectly competitive conditions in a product market in which case the economic profits of the firm would then be attributable to its monopsonistic power alone. But the case of an otherwise marginal firm in a perfectly competitive product market which is a monopsonistic buyer of labor and also economically profitable is highly unlikely because of its obviously stringent preconditions. Indeed, in spite of Joan Robinson's conclusion regarding its effects,(2) if monopsony power (neoclassical exploitation) exists, it is likely to be accompanied by monopoly power. Thus, typically, economic profits cannot in principle be attributed to the firm's monopsony power alone. That is, the economic profits that would permit higher wages could not be attributed unambiguously to neoclassical exploitation in the ordinary or expected real-world case.

It is argued below that, as Bloom [1940-41, p. 4131 asserted, high wages are not inconsistent with the exploitation of labor. In fact, high wages are to be expected when the exploiting firm is economically profitable due to monopoly power in its product market. As Landon [1970, p. 237-38] suggested in his allusion to the effect of technological change on wages, high wages are surely to be expected in the special case of the economically profitable innovative firm, which is a case in which exploitation is likely to prevail. The procedure to be followed below will be to first demonstrate the theoretical compatibility of high wages with pure neoclassical exploitation and then to offer evidence of the existence of a positive net relationship between ages and profits even when there is exploitation.

II. Pure Neoclassical Exploitation, Monopsony Power, and the Level of Wages

According to the neoclassical theory of exploitation as developed by Pigou [1962], Robinson [1948], Chamberlin [1947], and Bloom [1940-41], exploitation occurs when there is a discrepancy between labor's contribution to the revenue of the firm and the payment received by labor, where the discrepancy is a consequence of the monopsonistic power of the firm.(3) A firm has monopsony power whenever it faces a rising supply price of labor, i.e., whenever (dw/dL) > 0, where w is the wage rate paid by the firm, and L is the firm's rate of use of homogeneous labor. Assume no discrimination and that the average revenue product of labor, ARP.sub.L, is equal to or greater than the wage rate, W, and that the profit-maximizing firm's factor profit function is concave. Then the necessary and sufficient condition for neoclassical exploitation is that, at equilibrium, the firm chooses a rate of use of labor, L, for which

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