Productivity, Labor Complexity, and Wage Determination Procedures

This post concerns an implication of Marx’s treatment of productivity and labor complexity for the appropriateness of alternative processes of wage determination. For simplicity, it is assumed that all activity is productive in Marx’s sense (that is, productive of surplus value) and that conditions are competitive in the Marxian (and classical) sense that investment is free to flow in and out of sectors in search of the highest return. Introducing unproductive labor, including a substantial role for public sector and not-for-profit activity, and non-competitive elements would considerably complicate the analysis. The point of the exercise is to consider the incentive effects of alternative wage-determination procedures, from the perspective of Marx’s theory. It is suggested that Marx’s distinction between abstract and concrete labor implies that centralized wage determination, more than alternative wage-setting approaches, will be conducive to productivity growth.

Definitions and key distinctions

Productivity and labor complexity. Productivity pertains to concrete labor and the production of use values. Labor complexity pertains to abstract labor and the creation of value. At the macro level, variations in productivity, since they pertain to concrete labor, affect use-value production, whereas variations in labor complexity, since they pertain to abstract labor, affect value creation.

Simple and complex labor. Simple labor is labor that draws upon prevalent skills with average proficiency. Complex labor is labor that draws upon special skills. For the purposes of commodity production and exchange, complex labor must be converted into equivalent amounts of simple labor.

Value is measured in hours of simple labor. Since complex labor counts as a multiple of simple labor, complex labor is more creative of value than simple labor.

A question that arises is, what skills are sufficiently prevalent to be included when setting the bar on what counts as one hour of simple labor?

It may be that any reasonable line can be drawn. Wherever the line is drawn, the complexity of an hour of simple labor can be defined as 1. That is, 1 raw hour of simple labor will constitute 1 hour of simple labor, and so create 1 hour of value. Complex labor will have complexity in excess of 1, with 1 raw hour of complex labor creating more value than 1 hour of simple labor.

If the bar is set high on what counts as an hour of simple labor, it will simply mean that only a small fraction of total employment involves complex labor. Conversely, if the bar is set low, a much higher fraction of total employment will involve complex labor.

A practical definition would be to regard the labor performed, on average, by minimum-wage workers as constituting simple labor.

The value of labor power and wages

The value of labor power is the amount of socially necessary labor that goes into reproducing simple labor power. The value of labor power of a particular level of complexity is the cost to the worker of reproducing labor power of that complexity.

The wage paid for simple labor tends to the cost of reproducing simple labor power. This is socially determined, within limits. Workers, by organizing collectively, can raise the level of the wage, thereby raising the cost of reproducing simple labor power. Improvements in average productivity do not automatically translate into higher wages, but provide the potential for them. The potential can be realized through collective action.

Competition between workers will tend to establish wage differentials that reflect labor complexity. Since the development of complex labor power costs the worker more effort than the development of simple labor power, wages for complex labor will tend to exceed the wage for simple labor to an extent that reflects the degree of labor complexity.

Wages, productivity, and labor complexity

Both productivity and labor complexity hold relevance for wage determination.

The relevance of productivity is at the macro level; that is, it is the behavior of average productivity for the economy as a whole that holds significance.

The growth in average productivity indicates the scope for non-inflationary wages growth. For given distribution, wages growth in line with improvements in average productivity leaves the price level unaltered.

If the prevailing distribution of income is too far tilted one way or the other, policies will be needed to redress the situation. But once a desired status quo distribution has been established, wages growth in line with average productivity will be the appropriate target.

The relevance of labor complexity concerns wage relativities.

According to Marx, there will be pressure for wages to reflect labor complexity. This pressure is brought about through competition between workers for jobs. Since complex labor power is more costly to reproduce than simple labor power, it will tend to require a higher wage. Otherwise workers will be less inclined to incur the additional costs of reproducing complex labor power.

Accordingly, Marx held that rates of surplus value will tend to equalize across sectors as well as across skill categories of labor.

An implication for wage determination

Marx’s view that wage relativities, under competitive conditions, tend to reflect labor complexity rather than productivity has implications for alternative methods of wage determination.

If Marx’s analysis is correct, attempts to justify a move toward industry or enterprise level bargaining and away from centralized wage determination are based on a category error of conflating productivity/concrete labor with labor complexity/abstract labor.

To the extent that competition exerts pressure on wage relativities at the firm or industry level, it will act upon the relationship between wages and labor complexity, not upon the relationship between wages and firm-level or industry-level productivity.

Competition will tend to punish firms for paying wages out of line with labor complexity, not for paying wages out of line with firm-level or industry-level productivity.

The reason competition acts in this way can be briefly elaborated.

When relative wages differ from the levels commensurate with labor complexity, there will be incentive for workers to seek out jobs paying wages above the levels implied by labor complexity and to avoid jobs paying wages below these levels. Under competition between workers, wages will tend to the levels that reflect labor complexity or, when this is prevented, entry requirements or the difficulty of obtaining positions will tend to adjust in response to the competitive pressures.

In contrast, competition does not bring a tendency for relative wages to reflect firm-level or industry-level productivity. Productivity is largely in the job, not the worker, and will mostly reflect technology.

Consider the enterprise level and suppose, in the absence of any change in the complexity of labor, that productivity in a single firm doubles relative to the average for the economy as a whole. This firm will be under no competitive pressure to raise wages. Whatever wages other firms happen to be paying for the various categories of labor power will apply also to the individual firm. Since it has become no more costly for employees of this firm to reproduce their labor power, any attempt to demand higher wages will, under competitive conditions, be thwarted by other workers offering to take their places at the current wage.

These considerations imply that enterprise-level bargaining will be less conducive to strong macroeconomic performance than centralized wage determination. Enterprise bargaining, by permitting firms to pay lower wages for the same category of labor because they are low-productivity firms, disincentivizes productivity improvements. It helps prop up unproductive firms and punishes more productive firms. If, instead, all wages rise in line with average productivity, there is incentive for firms to improve productivity.

The effects of competition at the industry level differ from the effects at the enterprise level, but there will still be an absence of any pressure on an industry to pay wages in line with the industry’s productivity. If productivity in a particular industry rises relative to productivity in other industries, the impact of competition will be on prices, not the wages paid to workers in the industry. The prices of commodities produced by the sector will fall as a result of the industry’s rising productivity. Meanwhile, if the cost of reproducing the labor power purchased by the industry remains unchanged (because labor complexity remains the same), there will be no competitive pressure for the industry’s wages to change.

Industry-wide bargaining, by permitting low-productivity industries to pay lower wages for the same category of labor, disincentivizes productivity improvements in much the same way as enterprise-level bargaining disincentivizes productivity improvements at the enterprise level.

For these reasons, Marx’s theory provides a basis for predicting that productivity growth will be stronger under a regime of centralized wage determination than under a regime of firm or industry level wage determination.

The fate of low productivity firms and sectors depends on social necessity

Not all low-productivity firms/sectors will disappear. Low-productivity firms/industries that supply socially necessary output will be able to raise prices sufficiently to return the general rate of profit. The rising incomes, in line with average productivity, will mean that customers are willing to pay higher prices for such output.

To take a simple example, productivity does not rise much in hairdressing. But so long as a general need or desire for haircuts remains, hair salons will be able to raise prices along with wages. Competition will not prevent this. To the contrary, the tendency will be for hair salons only to operate so long as they return the general rate of profit. So long as they can raise prices sufficiently to return the general rate of profit – i.e. so long as demand in nominal terms grows in line with wages – the businesses will remain in operation and generate a normal profit.

For this reason, a requirement to pay wages in line with labor complexity – established through a centralized wage determination process – will not jeopardize the survival of such firms or industries.

In contrast, firms/industries that – for whatever reason – turn out no longer to be socially necessary will be unable to set prices sufficient to return the general rate of profit, and so will decline and eventually go out of business.

Among the firms/industries that remain socially necessary, the prices set by high-productivity firms/industries will tend to fall relative to the prices set by low-productivity firms/industries.

Centralized wage determination, in this view, does not impede the workings of competition, but rather incentivizes competition between firms on the basis of productivity rather than a race to the bottom on wages.

Related scholarly article

Jonathan Cogliano – Smith’s “Perfect Liberty” and Marx’s Equalized Rate of Surplus-Value

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Labor Complexity in Relation to Aggregate Marxian Value