Labour economics

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Job advertisement board in Shenzhen.

Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demands of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

In economics, Labour is the process in which both man and Nature participate, and in which man of his own accord starts, regulates, and controls the material re-actions between himself and Nature.[1] The elementary factors of the labour-process are 1), the personal activity of man, i.e., work itself, 2), the subject of that work, and 3), its instruments.[1]

Labour power[edit]

Labour power is a crucial subject in the field of economics, referring to the capacity to labour as distinguished from labour itself.[2]


Karl Marx defined labour power as follows:

"By labour-power or capacity for labour is to be understood the aggregate of those mental and physical capabilities existing in a human being, which he exercises whenever he produces a use-value of any description." [5]

He adds further on that:

"Labour-power, however, becomes a reality only by its exercise; it sets itself in action only by working. But thereby a definite quantity of human muscle, nerve. brain, &c., is wasted, and these require to be restored."

Labour power as a commodity[edit]

Labour power is a commodity. it is sold and bought on the market. A worker tries to sell his or her labour-power to an employer, in exchange for a wage or salary. If successful (the only alternative being unemployment), this exchange involves submitting to the authority of the capitalist for a specific period of time.

During that time, the worker does actual labour, producing goods and services. The capitalist can then sell these and obtain surplus value; since the wages paid to the workers are lower than the value of the goods or services they produce for the capitalist.[citation needed]

Labour power can also be sold by the worker on "own account", in which case he is self-employed, or it can be sold by an intermediary, such as a hiring agency. In principle a group of workers can also sell their labour-power as an independent contracting party. Some labour contracts are very complex, involving a number of different intermediaries.

Normally, the worker is legally the owner of his labour power, and can sell it freely according to his own wishes. However, most often the trade in labour power is regulated by legislation, and the sale may not be truly "free" - it may be a forced sale for one reason or another, and indeed it may be bought and sold against the real wishes of the worker even although he owns his own labour power. Various gradations of freedom and unfreedom are possible, and free wage labour can combine with slave labour or semi-slavery.

The concept of labour power as a commodity was first explicitly stated by Friedrich Engels in The Principles of Communism (1847):

Labour theory of value[edit]

The labour theory of value (LTV) is an economic theory of value that states that the economic value of a good or service is determined by the total amount of socially necessary labour required to produce it. When speaking in terms of labour theory of value, value, without any qualifying adjective should theoretically refer to the amount of labour necessary to the production of a marketable commodity, including the labour necessary to the development of any real capital employed in the production. Both David Ricardo and Karl Marx attempted to quantify and embody all labour components in order to develop a theory of the real price, or natural price of a commodity.[3]

Definitions of value and labour[edit]

When speaking in terms of a labour theory of value, value, without any qualifying adjective should theoretically refer to the amount of labour necessary to the production of a marketable commodity, including the labour necessary to the development of any real capital employed in the production. Both David Ricardo and Karl Marx attempted to quantify and embody all labour components in order to develop a theory of the real price, or natural price of a commodity.[4] The labour theory of value, as presented by Adam Smith, however, did not require the quantification of all past labour, nor did it deal with the labour needed to create the tools (capital) that might be employed in the production of a commodity. The Smith theory of value was very similar to the later utility theories in that Smith proclaimed that a commodity was worth whatever labour it would command in others (value in trade) or whatever labour it would "save" the self (value in use), or both. But this "value" is subject to supply and demand at a particular time.

The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. (Wealth of Nations Book 1, chapter V)

Smith's theory of price (which for many is the same as value) has nothing to do with the past labour spent in the production of a commodity. It speaks only of the labour that can be "commanded" or "saved" at present. If there is no use for a buggy whip then the item is economically worthless in trade or in use, regardless of all the labour spent in its creation.

Distinctions of economically pertinent labour[edit]

Value "in use" is the usefulness of this commodity, its utility. A classical paradox often comes up when considering this type of value. In the words of Adam Smith:

The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use ;' the other, 'value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it. (Wealth of Nations Book 1, chapter IV)

Value "in exchange" is the relative proportion with which this commodity exchanges for another commodity (in other words, its price in the case of money). It is relative to labour as explained by Adam Smith:

The value of any commodity, ... to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities (Wealth of Nations Book 1, chapter V; emphasis added).

Value (without qualification) is the labour embodied in a commodity under a given structure of production. Marx defined the value of the commodity by the third definition. In his terms, value is the 'socially necessary abstract labour' embodied in a commodity. To Ricardo and other classical economists, this definition serves as a measure of "real cost", "absolute value", or a "measure of value" invariable under changes in distribution and technology.[5]

Ricardo, other classical economists, and Marx began their expositions with the assumption that value in exchange was equal to or proportional to this labour value. They thought this was a good assumption from which to explore the dynamics of development in capitalist societies.

Other supporters of the labour theory of value used the word "value" in the second sense, to represent "exchange value".[6]

LTV and the labour process[edit]

Since the term value is understood in the LTV as denoting something created by labour, and its "magnitude" as something proportional to the quantity of labour performed, it is important to explain how the labour process both preserves value and adds new value in the commodities it creates.[note 1]

The value of a commodity increases in proportion to the duration and intensity of labour performed on average for its production. Part of what the LTV means by "socially necessary" is that the value only increases in proportion to this labour as it is performed with average skill and average productivity. So though workers may labour with greater skill or more productivity than others, these more skillful and more productive workers thus produce more value through the production of greater quantities of the finished commodity. Each unit still bears the same value as all the others of the same class of commodity. By working sloppily, unskilled workers may drag down the average skill of labour, thus increasing the average labour time necessary for the production of each unit commodity. But these unskillful workers cannot hope to sell the result of their labour process at a higher price (as opposed to value) simply because they have spent more time than other workers producing the same kind of commodities.

However, production not only involves labour, but also certain means of labour: tools, materials, power plants and so on. These means of labour — also known as means of production — are often the product of another labour process as well. So the labour process inevitably involves these means of production that already enter the process with a certain amount of value. Labour also requires other means of production that are not produced with labour and therefore bear no value: such as sunlight, air, uncultivated land, unextracted minerals, etc. While useful, even crucial to the production process, these bring no value to that process. In terms of means of production resulting from another labour process, LTV treats the magnitude of value of these produced means of production as constant throughout the labour process. Due to the constancy of their value, these means of production are referred to, in this light, as constant capital.

Consider for example workers who take coffee beans, use a roaster to roast them, and then use a brewer to brew and dispense a fresh cup of coffee. In performing this labour, these workers add value to the coffee beans and water that comprise the material ingredients of a cup of coffee. The worker also transfers the value of constant capital — the value of the beans; some specific depreciated value of the roaster and the brewer; and the value of the cup — to the value of the final cup of coffee. Again, on average the worker can transfer no more than the value of these means of labour previously possessed to the finished cup of coffee[note 2] So the value of coffee produced in a day equals the sum of both the value of the means of labour — this constant capital — and the value newly added by the worker in proportion to the duration and intensity of their work.

Often this is expressed mathematically as:

  • c is the constant capital of materials used in a period plus the depreciated portion of tools and plant used in the process. (A period is typically a day, week, year, or a single turnover: meaning the time required to complete one batch of coffee, for example.)
  • L is the quantity of labour time (average skill and productivity) performed in producing the finished commodities during the period
  • W is the value of the product of the period (w comes from the German word for value: wert)

Note: if the product resulting from the labour process is homogeneous (all similar in quality and traits, for example, all cups of coffee) then the value of the period’s product can be divided by the total number of items (use-values or v_u) produced to derive the unit value of each item. \begin{matrix}w_i= \frac{W}{\sum v_u}\,\end{matrix} where \sum v_u is the total items produced.

The LTV further divides the value added during the period of production, L, into two parts. The first part is the portion of the process when the workers add value equivalent to the wages they are paid. For example, if the period in question is one week and these workers collectively are paid $1,000, then the time necessary to add $1,000 to — while preserving the value of — constant capital is considered the necessary labour portion of the period (or week): denoted NL. The remaining period is considered the surplus labour portion of the week: or SL. The value used to purchase labour-power, for example the $1,000 paid in wages to these workers for the week, is called variable capital (v). This is because in contrast to the constant capital expended on means of production, variable capital can add value in the labour process. The amount it adds depends on the duration, intensity, productivity and skill of the labour-power purchased: in this sense the buyer of labour-power has purchased a commodity of variable use. Finally, the value added during the portion of the period when surplus labour is performed is called surplus value (s). From the variables defined above, we find two other common expression for the value produced during a given period as:


The first form of the equation expresses the value resulting from production, focusing on the costs c+v and the surplus value appropriated in the process of production, s. The second form of the equation focuses on the value of production in terms of the valued added by the labour performed during the process NL+SL.

The relation between values and prices[edit]

One issue facing the LTV is the relationship between value quantities on one hand and prices on the other. If a commodity's value is not the same as its price, and therefore the magnitudes of each likely differ, then what is the relation between the two, if any? Various LTV schools of thought provide different answers to this question. For example, some argue that value in the sense of the amount of labour embodied in a good acts as a centre of gravity for price.

However, most economists would say that cases where pricing is even approximately equal to the value of the labour embodied are only special cases, and not the general case. In the standard formulation, prices also normally include a level of income for "capital" and "land". These incomes are known as "profit" and "rent" respectively.

In Book 1, chapter VI, Adam Smith writes:

The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.

The final sentence explains how Smith sees value of a product as relative to labour of buyer or consumer, as opposite to Marx who sees the value of a product being proportional to labour of labourer or producer. And we value things, price them, based on how much labour we can avoid or command, and we can command labour not only in a simple way but also by trading things for a profit.

The demonstration of the relation between commodities' unit values and their respective prices is known in Marxian terminology as the transformation problem or the transformation of values into prices of production. The transformation problem has probably generated the greatest bulk of debate about the LTV. The problem with transformation is to find an algorithm where the magnitude of value added by labour, in proportion to its duration and intensity, is sufficiently accounted for after this value is distributed through prices that reflect an equal rate of return on capital advanced. If there is an additional magnitude of value or a loss of value after transformation compared with before then the relation between values (proportional to labour) and prices (proportional to total capital advanced) is incomplete. Various solutions and impossibility theorems have been offered for the transformation, but the debate has not reached any clear resolution.

LTV does not deny the role of supply and demand influencing price, since the price of a commodity is something other than its value. In Value, Price and Profit (1865), Karl Marx quotes Adam Smith and sums up:

It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with their values as determined by the respective quantities of labour required for their production.[7]

The LTV seeks to explain the level of this equilibrium. This could be explained by a cost of production argument—pointing out that all costs are ultimately labour costs, but this does not account for profit, and it is vulnerable to the charge of tautology in that it explains prices by prices.[8] Marx later called this "Smith's adding up theory of value".

Smith argues that labour values are the natural measure of exchange for direct producers like hunters and fishermen.[9] Marx, on the other hand, uses a measurement analogy, arguing that for commodities to be comparable they must have a common element or substance by which to measure them,[10] and that labour is a common substance of what Marx eventually calls commodity-values.[11]

Origins of the labour theory of value[edit]

The labour theory of value has developed over many centuries. It had no single originator, but rather many different thinkers arrived at the same conclusion independently. Some writers trace its origin to Thomas Aquinas.[12][13] In his Summa Theologiae (1265–1274) he expresses the view that "... value can, does and should increase in relation to the amount of labour which has been expended in the improvement of commodities."[14] Scholars such as Joseph Schumpeter have cited Ibn Khaldun, who in his Muqaddimah (1377), described labour as the source of value, necessary for all earnings and capital accumulation. He argued that even if earning “results from something other than a craft, the value of the resulting profit and acquired (capital) must (also) include the value of the labour by which it was obtained. Without labour, it would not have been acquired.”[15] Scholars have also pointed to Sir William Petty's Treatise of Taxes of 1662[16] and to John Locke's labour theory of property, set out in the Second Treatise on Government (1689), which sees labour as the ultimate source of economic value. Karl Marx himself credited Benjamin Franklin in his 1729 essay entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency" as being "one of the first" to advance the theory.[17]

Adam Smith accepted the theory for pre-capitalist societies but saw a flaw in its application to contemporary capitalism. He pointed out that if the "labour embodied" in a product equaled the "labour commanded" (i.e. the amount of labour that could be purchased by selling it), then profit was impossible. David Ricardo (seconded by Marx) responded to this paradox by arguing that Smith had confused labour with wages. "Labour commanded", he argued, would always be more than the labour needed to sustain itself (wages). The value of labour, in this view, covered not just the value of wages (what Marx called the value of labour power), but the value of the entire product created by labour.[18]

Ricardo's theory was a predecessor of the modern theory that equilibrium prices are determined solely by production costs associated with Neo-Ricardianism.[19]

Based on the discrepancy between the wages of labour and the value of the product, the "Ricardian socialists" — Charles Hall, Thomas Hodgskin, John Gray, and John Francis Bray, and Percy Ravenstone[20] — applied Ricardo's theory to develop theories of exploitation.

Marx expanded on these ideas, arguing that workers work for a part of each day adding the value required to cover their wages, while the remainder of their labour is performed for the enrichment of the capitalist. The LTV and the accompanying theory of exploitation became central to his economic thought.

19th century American individualist anarchists based their economics on the LTV, with their particular interpretation of it being called "Cost the limit of price". They, as well as contemporary individualist anarchists in that tradition, hold that it is unethical to charge a higher price for a commodity than the amount of labour required to produce it. Hence, they propose that trade should be facilitated by using notes backed by labour.

Adam Smith and David Ricardo[edit]

Adam Smith held that, in a primitive society, the amount of labour put into producing a good determined its exchange value, with exchange value meaning in this case the amount of labour a good can purchase. However, according to Smith, in a more advanced society the market price is no longer proportional to labour cost since the value of the good now includes compensation for the owner of the means of production: "The whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him."[21] "Nevertheless, the 'real value' of such a commodity produced in advanced society is measured by the labour which that commodity will command in exchange. ... But [Smith] disowns what is naturally thought of as the genuine classical labour theory of value, that labour-cost regulates market-value. This theory was Ricardo’s, and really his alone."[22]

Classical economist David Ricardo's labour theory of value holds that the value of a good (how much of another good or service it exchanges for in the market) is proportional to how much labour was required to produce it, including the labour required to produce the raw materials and machinery used in the process. David Ricardo stated it as, "The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not as the greater or less compensation which is paid for that labour." (Ricardo 1817) In this heading Ricardo seeks to differentiate the quantity of labour necessary to produce a commodity from the wages paid to the labourers for its production. However, Ricardo was troubled with some deviations in prices from proportionality with the labour required to produce them. For example, he said "I cannot get over the difficulty of the wine, which is kept in the cellar for three or four years [i.e., while constantly increasing in exchange value], or that of the oak tree, which perhaps originally had not 2 s. expended on it in the way of labour, and yet comes to be worth £100."(Quoted in Whitaker) Of course, a capitalist economy stabilizes this discrepancy until the value added to aged wine is equal to the cost of storage. If anyone can hold onto a bottle for four years and become rich, that would make it hard to find freshly corked wine. There is also the theory that adding to the price of a luxury product increases its exchange-value by mere prestige.

The labour theory as an explanation for value contrasts with the subjective theory of value, which says that value of a good is not determined by how much labour was put into it but by its usefulness in satisfying a want and its scarcity. Ricardo's labour theory of value is not a normative theory, as are some later forms of the labour theory, such as claims that it is immoral for an individual to be paid less for his labour than the total revenue that comes from the sales of all the goods he produces.

It is arguable to what extent these classical theorists held the labour theory of value as it is commonly defined.[23][24][25][26] For instance, David Ricardo theorized that prices are determined by the amount of labour but found exceptions for which the labour theory could not account. In a letter, he wrote: "I am not satisfied with the explanation I have given of the principles which regulate value." Adam Smith theorized that the labour theory of value holds true only in the "early and rude state of society" but not in a modern economy where owners of capital are compensated by profit. As a result, "Smith ends up making little use of a labour theory of value."[27]


Sample labour for labour note for the Cincinnati Time Store. Scanned from Equitable Commerce (1846) by Josiah Warren

Pierre Joseph Proudhon's mutualism[28] and American individualist anarchists such as Josiah Warren, Lysander Spooner and Benjamin Tucker[29] adopted the liberal Labour Theory of Value of classical economics but used it to criticise capitalism instead favouring a non-capitalist market system.[30]

Josiah Warren is widely regarded as the first American anarchist,[31][32] and the four-page weekly paper he edited during 1833, The Peaceful Revolutionist, was the first anarchist periodical published,[33]Cost the limit of price was a maxim coined by Josiah Warren, indicating a (prescriptive) version of the labour theory of value. Warren maintained that the just compensation for labour (or for its product) could only be an equivalent amount of labour (or a product embodying an equivalent amount).[34] Thus, profit, rent, and interest were considered unjust economic arrangements[35] In keeping with the tradition of Adam Smith's The Wealth of Nations,[36] the "cost" of labour is considered to be the subjective cost; i.e., the amount of suffering involved in it.[34] He put his theories to the test by establishing an experimental "labour for labour store" called the Cincinnati Time Store at the corner of 5th and Elm Streets in what is now downtown Cincinnati, where trade was facilitated by notes backed by a promise to perform labour. "All the goods offered for sale in Warren's store were offered at the same price the merchant himself had paid for them, plus a small surcharge, in the neighborhood of 4 to 7 percent, to cover store overhead."[32] The store stayed open for three years; after it closed, Warren could pursue establishing colonies based on mutualism. These included "Utopia" and "Modern Times." Warren said that Stephen Pearl Andrews' The Science of Society, published in 1852, was the most lucid and complete exposition of Warren's own theories.[37]

Mutualism is an economic theory and anarchist school of thought that advocates a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labour in the free market.[38] Integral to the scheme was the establishment of a mutual-credit bank that would lend to producers at a minimal interest rate, just high enough to cover administration.[39] Mutualism is based on a labour theory of value that holds that when labour or its product is sold, in exchange, it ought to receive goods or services embodying "the amount of labour necessary to produce an article of exactly similar and equal utility".[40] Mutualism originated from the writings of philosopher Pierre-Joseph Proudhon.

Collectivist anarchism as defended by Mikhail Bakunin defended a form of labour theory of value when it advocated a system where "all necessaries for production are owned in common by the labour groups and the free communes ... based on the distribution of goods according to the labour contributed".[41]

Karl Marx[edit]

Contrary to popular belief,[42] Marx opposed "ascribing a supernatural creative power to labour", arguing that:

Labour is not the source of all wealth. Nature is just as much a source of use values (and it is surely of such that material wealth consists!) as labour, which is itself only the manifestation of a force of nature, human labour power.[43]

Here Marx was distinguishing between exchange value (the subject of the LTV) and use value.

Marx used the concept of "socially necessary abstract labour-time" to introduce a social perspective distinct from his predecessors and neoclassical economics. Whereas most economists start with the individual's perspective, Marx started with the perspective of society as a whole. "Social production" involves a complicated and interconnected division of labour of a wide variety of people who depend on each other for their survival and prosperity. "Abstract" labour refers to a characteristic of commodity-producing labour that is shared by all different kinds of heterogeneous (concrete) types of labour. That is, the concept abstracts from the particular characteristics of all of the labour and is akin to average labour.

"Socially necessary" labour refers to the quantity required to produce a commodity "in a given state of society, under certain social average conditions or production, with a given social average intensity, and average skill of the labour employed."[44] That is, the value of a product is determined more by societal standards than by individual conditions. This explains why technological breakthroughs lower the price of commodities and put less advanced producers out of business. Finally, it is not labour per se, which creates value, but labour power sold by free wage workers to capitalists. Another distinction to be made is that between productive and unproductive labour. Only wage workers of productive sectors of the economy produce value.[note 3]

Capitalist labour economics[edit]

There are two sides to labour economics in capitalist systems. Labour economics can be seen as the application of microeconomic techniques to the labor market or the use of macroeconomic techniques. Microeconomic techniques study the role of individuals in the labour market. Macroeconomic techniques look at the interrelations between the labour market, the goods market, the money market, and the foreign trade market. It looks at how these interactions influence macro variables such as employment levels, participation rates, aggregate income and Gross Domestic Product.

Labour process[edit]

The labour process is the basis of the connexion between labour and capitalist economics. First, capitalist buys labour-power in order to use it; and labour-power in use is labour itself. The purchaser of labour-power consumes it by setting the seller of it to work. By working, the latter becomes actually, what before he only was potentially, labour-power in action, a labourer. In order that his labour may re-appear in a commodity, he must, before all things, expend it on something useful, on something capable of satisfying a want of some sort.[1] Hence, what the capitalist sets the labourer to produce, is a particular use-value, a specified article. The fact that the production of use-values, or goods, is carried on under the control of a capitalist and on his behalf, does not alter the general character of that production. We shall, therefore, in the first place, have to consider the labour-process independently of the particular form it assumes under given social conditions.[45]

Neoclassical macroeconomics of labour markets[edit]

The labour force is defined as the number of people of working age, who are either employed or actively looking for work. The participation rate is the number of people in the labour force divided by the size of the adult civilian non-institutional population (or by the population of working age that is not institutionalised). The non-labour force includes those who are not looking for work, those who are institutionalised such as in prisons or psychiatric wards, stay-at home spouses, children, and those serving in the military. The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age). In these statistics, self-employed people are counted as employed.

Variables like employment level, unemployment level, labour force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over a duration of time. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements from the labour force. Changes in unemployment depend on: inflows made up of non-employed people starting to look for jobs and of employed people who lose their jobs and look for new ones; and outflows of people who find new employment and of people who stop looking for employment. When looking at the overall macroeconomy, several types of unemployment have been identified, including:

  • Frictional unemployment — This reflects the fact that it takes time for people to find and settle into new jobs. If 12 individuals each take one month before they start a new job, the aggregate unemployment statistics will record this as a single unemployed worker. Technological advancement often reduces frictional unemployment, for example: internet search engines have reduced the cost and time associated with locating employment.
  • Structural unemployment — This reflects a mismatch between the skills and other attributes of the labour force and those demanded by employers. If 4 workers each take six months off to re-train before they start a new job, the aggregate unemployment statistics will record this as two unemployed workers. Rapid industry changes of a technical and/or economic nature will usually increase levels of structural unemployment, for example: widespread implementation of new machinery or software will require future employees to be trained in this area before seeking employment. The process of globalisation has contributed to structural changes in labour, some domestic industries such as textile manufacturing have expanded to cope with global demand, whilst other industries such as agricultural products have contracted due to greater competition from international producers.
  • Natural rate of unemployment — This is the summation of frictional and structural unemployment, that excludes cyclical contributions of unemployment e.g. recessions. It is the lowest rate of unemployment that a stable economy can expect to achieve, seeing as some frictional and structural unemployment is inevitable. Economists do not agree on the natural rate, with estimates ranging from 1% to 5%, or on its meaning — some associate it with "non-accelerating inflation". The estimated rate varies from country to country and from time to time.
  • Demand deficient unemployment — In Keynesian economics, any level of unemployment beyond the natural rate is most likely due to insufficient demand in the overall economy. During a recession, aggregate expenditure, is deficient causing the underutilisation of inputs (including labour). Aggregate expenditure (AE) can be increased, according to Keynes, by increasing consumption spending (C), increasing investment spending (I), increasing government spending (G), or increasing the net of exports minus imports (X−M).
    {AD = C + I + G + (X−M)}

Neoclassical microeconomics of labour markets[edit]

Neo-classical economists view the labour market as similar to other markets in that the forces of supply and demand jointly determine price (in this case the wage rate) and quantity (in this case the number of people employed).

However, the labour market differs from other markets (like the markets for goods or the financial market) in several ways. Perhaps the most important of these differences is the function of supply and demand in setting price and quantity. In markets for goods, if the price is high there is a tendency in the long run for more goods to be produced until the demand is satisfied. With labour, overall supply cannot effectively be manufactured because people have a limited amount of time in the day, and people are not manufactured.

The labour market also acts as a non-clearing market: according to neoclassical theory most markets have a point of equilibrium without excess surplus or demand, but the labour market is expected to have a persistent level of unemployment. Contrasting the labour market to other markets also reveals persistent compensating differentials among similar workers. The standard competitive assumption leads to clear conclusions: workers earn their marginal product of labour.[46]


Many sociologists, political economists, and heterodox economists claim that labour economics tends to lose sight of the complexity of individual employment decisions.[citation needed] These decisions, particularly on the supply side, are often loaded with considerable emotional baggage and a purely numerical analysis can miss important dimensions of the process, such as social benefits of a high income or wage rate regardless of the marginal utility from increased consumption or specific economic goals.

From the perspective of mainstream economics, neoclassical models are not meant to serve as a full description of the psychological and subjective factors that go into a given individual's employment relations, but as a useful approximation of human behaviour in the aggregate, which can be fleshed out further by the use of concepts such as information asymmetry, transaction costs, contract theory etc.

Also missing from most labour market analyses is the role of unpaid labour. Even though this type of labour is unpaid it can nevertheless play an important part in society. The most dramatic example is child raising. However, over the past 25 years an increasing literature, usually designated as the economics of the family, has sought to study within household decision making, including joint labour supply, fertility, child raising, as well as other areas of what is generally referred to as home production.[47]

Wage slavery[edit]

Main article: Wage slavery

The labour market, as institutionalised under today's market economic systems, has been criticised,[48] especially by both mainstream socialists and anarcho-syndicalists,[49][50][51][52] who utilise the term wage slavery[53][54] as a pejorative for wage labour. Socialists draw parallels between the trade of labour as a commodity and slavery. Cicero is also known to have suggested such parallels.[55]

According to Noam Chomsky, analysis of the psychological implications of wage slavery goes back to the Enlightenment era. In his 1791 book On the Limits of State Action, classical liberal thinker Wilhelm von Humboldt explained how "whatever does not spring from a man's free choice, or is only the result of instruction and guidance, does not enter into his very nature; he does not perform it with truly human energies, but merely with mechanical exactness" and so when the labourer works under external control, "we may admire what he does, but we despise what he is."[56] Both the Milgram and Stanford experiments have been found useful in the psychological study of wage-based workplace relations.[57]

The American philosopher John Dewey posited that until "industrial feudalism" is replaced by "industrial democracy," politics will be "the shadow cast on society by big business".[58] Thomas Ferguson has postulated in his investment theory of party competition that the undemocratic nature of economic institutions under capitalism causes elections to become occasions when blocs of investors coalesce and compete to control the state.[59]

As per anthropologist David Graeber, the earliest wage labour contracts we know about were in fact contracts for the rental of chattel slaves (usually the owner would receive a share of the money, and the slave, another, with which to maintain his or her living expenses.) Such arrangements, according to Graeber, were quite common in New World slavery as well, whether in the United States or Brazil. C. L. R. James argued that most of the techniques of human organisation employed on factory workers during the industrial revolution were first developed on slave plantations.[60]

Additionally, Marxists posit that labour-as-commodity, which is how they regard wage labour,[61] provides an absolutely fundamental point of attack against capitalism.[62] "It can be persuasively argued," noted one concerned philosopher, "that the conception of the worker's labour as a commodity confirms Marx's stigmatisation of the wage system of private capitalism as 'wage-slavery;' that is, as an instrument of the capitalist's for reducing the worker's condition to that of a slave, if not below it."[63]

See also[edit]


  1. ^ a b c [1]
  2. ^ Fine, Ben; Saad-Filho, Alfredo (2010). Marx's Capital (5th ed. ed.). London: Pluto Press. p. 20. ISBN 978-0-7453-3016-7. 
  3. ^ e.g. see - Junankar, P. N., Marx's economics, Oxford : Philip Allan, 1982, ISBN 0-86003-125-X or Peach, Terry "Interpreting Ricardo", Cambridge: Cambridge University Press, 1993, ISBN 0-521-26086-8
  4. ^ e.g. see - Junankar, P. N., Marx's economics, Oxford : Philip Allan, 1982, ISBN 0-86003-125-X or Peach, Terry "Interpreting Ricardo", Cambridge: Cambridge University Press, 1993, ISBN 0-521-26086-8
  5. ^ Ricardo, David (1823), 'Absolute Value and Exchange Value', in "The Works and Correspondence of David Ricardo", Volume 4, Cambridge University Press, 1951 and Sraffa, Piero and Maurice Dobb (1951), 'Introduction', in "The Works and Correspondence of David Ricardo", Volume 1, Cambridge University Press, 1951.
  6. ^ Proudhon, Pierre J., 1851, General Idea of the Revolution in the 19th Century, study 6.
  7. ^ Marx, Karl (1865). Value, Price and Profit.
  8. ^ Piero Sraffa and Maurice H. Dobb (1951). "General Preface", The Works and Correspondence of David Ricardo, Vol. 1, Cambridge University Press
  9. ^ Smith On Labour Value
  10. ^ Marx, Karl Value Price and Profit
  11. ^ (Marx 1867)
  12. ^ Russel, Bertrand (1946). History of Western philosophy. p. 578. 
  13. ^ Baeck, L. (1994). The Mediterranean tradition in economic thought. New York: Routledge. p. 151. ISBN 0415093015. 
  14. ^ Jaffe, Austin J.; Lusht, Kenneth M. (2003). "The History of the Value Theory: The Early Years". Essays in honor of William N. Kinnard, Jr. Boston: Kluwer Academic. p. 11. ISBN 1402075162. 
  15. ^ Oweiss, I. M. (1988). "Ibn Khaldun, the Father of Economics". Arab Civilization: Challenges and Responses. New York University Press. ISBN 0-88706-698-4. 
  16. ^ Parrington vol 1 ch 3
  17. ^ Karl Marx,Value, Price and Profit, 1865, Part VI.
  18. ^ Ormazabal, Kepa M. (2006); Adam Smith on Labour and Value: Challenging the Standard Interpretation
  19. ^ The Neo-Ricardians at the Wayback Machine (archived April 18, 2009), New School University
  20. ^ Utopians and Socialists: Ricardian Socialists at the Wayback Machine (archived February 14, 2004), History of Economic Thought, New School University
  21. ^ Smith quoted in Whitaker, Albert C. History and Criticism of the Labour Theory of Value, pp. 15-16
  22. ^ Whitaker, Albert C. History and Criticism of the Labour Theory of Value, pp. 15-16
  23. ^ Whitaker, Albert C. Albert C. Whitaker, History and Criticism of the Labour Theory of Value
  24. ^ Gordon, Donald, F. (1959). What Was the Labour Theory of Value?. American Economic Review 49 (2). pp. 462–472. 
  25. ^ King, Peter and Ripstein Arthur. Did Marx Hold a Labour Theory of Value?
  26. ^ University of
  27. ^ Canterbery, E. Ray, A Brief History of Economics: Artful Approaches to the Dismal Science, World Scientific (2001), pp. 52-53
  28. ^ "Thus, the classical solution of expressing the value of goods and services in terms of man hours, which was developed by the orthodox (political) economists of the time, was adopted by both Proudhon and Marx." "Beyond Marx and Proudhon" by Takis Fotopoulos
  29. ^ "The most basic difference is that the individualist anarchists rooted their ideas in the labour theory of value while the "anarcho"-capitalists favour mainstream marginalist theory." An Anarchist FAQ
  30. ^ "Like Proudhon, they desired a (libertarian) socialist system based on the market but without exploitation and which rested on possession rather than capitalist private property"An Anarchist FAQ
  31. ^ Palmer, Brian (2010-12-29) What do anarchists want from us?,
  32. ^ a b Riggenbach, Jeff (2011-02-25) Josiah Warren: The First American Anarchist, Mises Institute
  33. ^ William Bailie, [2] Josiah Warren: The First American Anarchist — A Sociological Study, Boston: Small, Maynard & Co., 1906, p. 20
  34. ^ a b In Equitable Commerce, Warren writes, "If a priest is required to get a soul out of purgatory, he sets his price according to the value which the relatives set upon his prayers, instead of their cost to the priest. This, again, is cannibalism. The same amount of labour equally disagreeable, with equal wear and tear, performed by his customers, would be a just remuneration
  35. ^ Wendy McElroy, "Individualist Anarchism vs. "Libertarianism" and Anarchocommunism," in the New Libertarian, issue #12, October, 1984.
  36. ^ Smith writes: "The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." Note, also, the sense of "labour" meaning "suffering."
  37. ^ Charles A. Madison. "Anarchism in the United States". Journal of the History of Ideas, Vol. 6, No. 1. (Jan., 1945), pp. 53
  38. ^ "Introduction". Retrieved 2010-04-29. 
  39. ^ Miller, David. 1987. "Mutualism." The Blackwell Encyclopedia of Political Thought. Blackwell Publishing. p. 11
  40. ^ Tandy, Francis D., 1896, Voluntary Socialism, chapter 6, paragraph 15.
  41. ^ — Darby Tillis. "An Anarchist FAQ". Retrieved 2010-09-20. 
  42. ^ cf E F Schumacher,Small is Beautiful, Pt 1, ch 1.
  43. ^ Critique of the Gotha Program ch 1
  44. ^ "Value, Price and Profit ch 6
  45. ^ [3]
  46. ^ Gustav Ranis (February 1997). "The Micro-Economics of Surplus Labour". Yale University. 
  47. ^ (Sandiaga S. Unno, Anindya N Bakrie, Rosan Perkasa, Morendy Octora : The Young Strategic Renaissance's In Asia)
  48. ^ Ellerman 1992.
  49. ^ Thompson 1966, p. 599.
  50. ^ Thompson 1966, p. 912.
  51. ^ Ostergaard 1997, p. 133.
  52. ^ Lazonick 1990, p. 37.
  53. ^ "wage slave". Retrieved 4 March 2013. 
  54. ^ "wage slave". Retrieved 4 March 2013. 
  55. ^ "...vulgar are the means of livelihood of all hired workmen whom we pay for mere manual labour, not for artistic skill; for in their case the very wage they receive is a pledge of their slavery." – De Officiis [4]
  56. ^ Chomsky 1993, p. 19.
  57. ^ Thye & Lawler 2006.
  58. ^ "As long as politics is the shadow cast on society by big business, the attenuation of the shadow will not change the substance", in "The Need for a New Party" (1931), Later Works 6, p163
  59. ^ Ferguson 1995.
  60. ^ Graeber 2004, p. 37.
  61. ^ Marx 1990, p. 1006: "[L]abour-power, a commodity sold by the worker himself."
  62. ^ Another one, of course, being the capitalists' alleged theft from workers via surplus-value.
  63. ^ Nelson 1995, p. 158. This Marxist objection is what motivated Nelson's essay, which claims that labour is not, in fact, a commodity.


  1. ^ Unless otherwise noted, the description of the labour process and the role of the value of means of production in this section are drawn from chapter 7 of Capital vol1 (Marx 1867).
  2. ^ In the case of instruments of labour, such as the roaster and the brewer (or even a ceramic cup) the value transferred to the cup of coffee is only a depreciated value calculated over the life of those instruments of labour according to some accounting convention.
  3. ^ For the difference between wage workers and working animals or slaves confer: John R. Bell: Capitalism and the Dialectic - The Uno-Sekine Approach to Marxian Political Economy, p. 45. London, Pluto Press 2009

Further reading[edit]

Orley C. Ashenfelter and Richard Layard, ed., 1986, v. 1 & 2;
Orley Ashenfelter and David Card, ed., 1999, v. 3A, 3B, and 3C
Orley Ashenfelter and David Card, ed., 2011, v. 4A & 4B.
  • Vianello, F. [1987], “Labour theory of value”, in: Eatwell, J. and Milgate, M. and Newman, P. (eds.): The New Palgrave: A Dictionary of Economics, Macmillan e Stockton, London e New York, ISBN 978-09-35-85910-2.
  • Wolff, Jonathan (2003). " Karl Marx in Stanford Encyclopedia of Philosophy
  • Wolff, Richard D., Bruce B. Roberts and Antonio Callari (1982), "Marx's (not Ricardo's) 'Transformation Problem': A Radical Reconceptualization", History of Political Economy 14 (4): 564–82, doi:10.1215/00182702-14-4-564. 

External links[edit]