By Arjun Jayadev,Associate Professor, University of Massachusetts, Boston. Originally published at the Institute for New Economic Thinking website
At some point during their undergraduate education, economists will encounter an apparently innocuous equation that will forever change their way of thinking: MPL=w denotes that a worker’s remuneration is equal to his or her marginal product in a competitive labor market. In other words, your wage is determined by what you contribute to output.
This equation forms the benchmark assumption of the labor market (from which later deviations are allowed), and underpins the standard defense of income inequality. If a worker is paid according to her marginal product then her wage is ‘just’ and deserved, because that is what she contributed to social output. The theory that the distribution of income and wages reflects the marginal contribution of different individuals to output is the theoretical foundation in economics for what is known as ‘just deserts’, and has been used to justify growing social inequality, notably in the recent argument by Greg Mankiw in defense of the wealthiest 1 percent. Its thinking reinforces the idea that economics assumes a just world.
In a new paper, MacArthur award winner and Professor Emerita Nancy Folbre systematically and thoroughly dismantles the notion of just deserts. She argues that, for a wide range of reasons — including the fact that markets that are not competitive, a lack of appropriate governance, opportunistic manipulation of markets by powerful groups, collective action and similar real world factors — there can be a very large gap between contribution to social output and wage outcomes. She examines a wide range of situations in which outcomes deviate considerably from the textbook ideal of the normal functioning of competitive markets. Her evidence suggests the need for serious re-examination of the just-world assumption, and invites instead a focus on the factors that shape vastly different economic situations for different individuals.
Folbre has spent a lifetime working and understanding phenomena outside the remit of competitive labor markets, most recently in understanding the crucial importance of the care economy and reciprocity for the sustenance of society — the subject of a wide-ranging interview with Folbre conducted by the Institute.
Yves here. A section of the INET summary of the Folbre interview, to give you a taste of her observations:
Some 26 million people provide unpaid health care services in households. Commercial care is increasing, in part because of the aging of the population and the increased participation of women in the labor market. Children, the sick and the elderly still need to be looked after, and there are fewer people at home to look after them. Conditions of work in the care industries are poor, with low pay and little training; fewer than half of all child-care workers receive full health insurance, for themselves or their own children. The quality of care is also often poor; some 40 percent of nursing homes repeatedly fail health and safety inspections.
But care is significantly undervalued, particularly in an economic sense, Folbre argues, in both the household and in the labor market. In order to prosper, a society requires a continuing flow of individuals, knowledge and dispositions (such as reliability or inventiveness or trust). These resources can be thought of as flowing from a stock. But the stock is itself produced in large part by care. The measurement of gross domestic product involves a heroic effort to impute a value to the services provided by the stock of owner-occupied houses, as Folbre points out; no such effort is made to impute a value to ”happy, healthy and successful children.” It is something that does not readily lend itself to an array of mathematical economic models.