Stephen Gordon is wondering whether demographic changes account for concentration of income distribution.
I’ve never bought the wages = MRP story, for many reasons.
First, productivity is a function of the firm or industry, whereas wages are determined by the occupation. And most occupations are complementary.
From the BLS FAQ:
Why don’t we measure productivity for particular groups, such as white-collar workers?
BLS productivity measures are based on aggregate national measures of outputs and inputs. These data sources do not provide the information BLS would need to construct occupational measures. There are also conceptual obstacles to disaggregating these national measures. For example, the output of a factory may require both white-collar and blue-collar inputs, and it is therefore unclear how to allocate the output to the two groups separately.
Imagine a tech firm that has a QA department, an engineering department, technical writers, marketing staff, system administrators, accountants, lawyers, customer support, sales staff, sales engineers, human resources, and executives.
That is a simple firm.
Now the firm’s revenues increase (or decrease). How to allocate this change in revenue among the different occupations?
The notion that some form of MRS can determine relative wages is a bit odd. It suggests that the firm would engage in a series of experiments — say laying off some engineers and hiring more lawyers, to see which adds more to revenue in order to efficiently determine the wages paid to each occupation.
There is a reason why firms don’t do this. First, assume the firm has 100 occupations, so it engages in
100 100! = 9.33262154 × 10157 layoff/hire shifts and then monitors its own revenue. Next, the firm would need to determine whether, after a staffing change, the change in revenue was attributable to market forces, to the laid off individual being genuinely more or less productive, or to the occupation as a whole being more or less productive. Therefore to separate signal from noise, it would need to gather a lot of data, and to keep gathering this data as the market or the firm’s own product line up changed. But there are costs (e.g. hiring and firing costs) that make such a wage determination exercise prohibitive.
Therefore the first obstacle is that gathering data about the MRP of occupations is too expensive.
The second obstacle is that it takes time, whereas the MRP of workers is state-contingent. When the firm decides to layoff some human resources staff and hire more technical writers, the effects of this decision are revealed over long time periods. And of course the market conditions will be different then, so you need to repeat this experiment over the whole business cycle. But firms, at one stage of development, need more engineers than sales staff, whereas at another stage of development they need more sales staff than engineers.
By the time you’ve gathered all the data you need, your data is obsolete.
More or less, firms understand which employees are high performing and which business functions are critical. But that general understanding does not translate into a specific “MRP” number that is stamped on someone’s forehead. There are problems of attribution. Business units fight over credit for performance, and it pays to know how to cover your ass or how to take credit. These skills wouldn’t be valuable if there wasn’t deep ambiguity about who contributed to the bottom line and who didn’t.
One could argue, even if firms do not engage in useful experimentation, that mere competition among firms will ensure that firms that accurately judge the MRP of workers will survive whereas firms that do not will fail. This is a type of evolutionary argument. But there is no “right” way to survive, and the organisms that exist are not perfectly optimized in all respects. Moreover, evolution requires millions of years, whereas firms and occupations are constantly changing, as is relative compensation of occupations.
Firms need to only be as efficient as their peers, and there are many different solutions to the competition problem, just as there are many different configurations of compensation that are “good enough” for firms to survive. In Germany, executives don’t earn huge salaries relative to their employees, whereas in the U.S. they do. Both are good enough to allow firms to survive. Which pseudo-equilibrium is selected depends on custom, culture, power relations, and reservation wages.
Added BLS quote and link to Shapley Value.