Time Product vs the Marginal Product of Labour

Is the marginal product of labour still a useful concept? It depends, especially since some labour translates into final product for individual consumers primarily due to individual providers. For all practical purposes, some forms of time based activity which translate into final product, have little to do with the marginal product of labour, even though such labour may benefit from augmentation in the form of supporting personnel and/or automation.

Marginal product of labour as concept, could certainly benefit from further discussion. All the more so, since attacks on this concept aren't necessarily grounded in a complete understanding of when the concept fully applies. Hence Scott Sumner provides a useful post for Econlog where he asks "Are workers paid their marginal product? Should they be?" He explains:

There is no obvious straightforward way to think about the marginal product of labor; it depends on many institutional factors.

Clearly, when it comes to different perceptions of fairness re wage distribution, this is an important point on Sumner's part. Yet he highlights the fact average wages have risen faster than median wages, which makes inequality more problematic than would be the case otherwise. Further, credentialing is another aspect of income polarization which obscures marginal product of labour as a valid concept. When wages, income and compensation are closely linked to IP rights, one's time value potential becomes even more complex.

Home ownership is another factor in these considerations, because housing asset valuations can be misconstrued as "excess" capital in relation to labour. Even though housing is representative of income, these aggregates are still a partial representation of wages and income which derive from the marginal product of labour. Hence part of what makes this capital appear excessive, is due to the growing factor of time based product compensation which does not derive from the marginal product of labour.

The marginal product of labour does exist in a relatively pure form, but in many respects it inhabits multiple points along a spectrum for derived economic value. While one end of the spectrum represents the marginal product of labour (traditional tradable sector activity and manufacture), the other end of the spectrum gives way to present day societal expectations for human capital investment. In a pure form, this is time value that is derived solely from product quality, rather than quantity.

Merit affects these distributions in different ways. Merit based skill can lead to both increased quality and output in tradable sector activity, which in turn creates additional revenue for employee distribution. However, merit based skill in non tradable time based product, tends to lack additional revenue based on quantity of output. Consequently, it relies on quality product definition to do the heavy lifting of covering expenses and creating compensation for human capital investment. Last but certainly not least, the middle of the spectrum contains high skill time value which is more likely to contribute to intangible forms of institutional product (both tradable and non tradable sectors), rather than the compensation of individual professionals.

How might someone with a utilitarian perspective respond to these realities? It's complicated. Nevertheless, when it comes to time based product (as one of the most sought after forms of employment of our time!), monetary aggregates can only go so far. Once price making reaches a certain point in the societal coordination of time based services, money loses its ability to fully represent the time value of all would be participants who struggle to gain access on these terms. In other words, money alone can't be expected do the entire job, of providing maximum utility for the benefit of all concerned. Is time based product a detractor, then, to total factor productivity, as contrast with the marginal product of labour? Again, Scott Sumner:

Furthermore, the marginal product of a worker who cooperates with many other workers and many other machines, doesn't necessarily match our intuition as to what the term "productivity" means. There's nothing in marginal product theory to prevent a scenario where one man owns all the capital and earns 99% of national income, and the other 1% is divided between 150 million workers on the basis of the MP of each worker. That's obviously not likely to occur, but it's not ruled out by the theory. 

When tradable sector activity was still dominant in advanced economies, the marginal product of labour was much more relevant for employment compensation. In contrast, a recent jobs report shows the prevalence of sectors with high representations of time based product (education, healthcare, professional and business services) as compared with lower employment figures for manufacture, construction and mining. Yet it's the latter, where the marginal product of labour is fairly simple to discern. If a decreasing percentage of employment is fully understandable in terms of output and revenue potential, how to remain certain of economic stability in the foreseeable future, given the power struggles taking place in today's non tradable sectors?

Alas, the intangibles of non tradable sector activity are contributing to the economic uncertainties which in turn exacerbate populism and nationalism. Let's focus on creating more tangible forms of services generation, so that aggregate time value can ultimately be recreated, for those who are afraid (or angry) they will only be left on the sidelines.