Theoretical considerations behind the debate on wage levels, and some practical consequences
Abstract
While the Classical School had focused on primary distribution (that is, the distribution of wages and profits during production), the Neoclassical and Austrian Schools no longer concerned themselves with these issues. However, since the Cambridge Capital Controversies have revealed that the neoclassical production function does not yield a “meritocratic” theory of the distribution of wages/profits based on distinct productivities of capital and labour, the Neoclassical and Austrian Schools cannot provide a coherent theory of profit. As a consequence, they also cannot explain how the wage/profit ratio arises in the economy. The only corroborated theory comes from Pierro Sraffa and the Post-Ricardian School, who conclude that this primary distribution is social and not economic in nature (i.e. it is based on the relative strength of capital and labour, and not on supposed distinct productivities). The practical consequence of these theoretical considerations is that apart from the obvious constraint of the level of total factor productivity, relative social strengths (measured by indicators such as collective bargaining coverage) have a high explanatory value in terms of accounting for wage shares within value added, and therefore the resulting wage levels.
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