Methodological issues in testing the marginal productivity theory

Abstract

Several attempts have been made to verify the marginal productivity theory of distribution. None of the recent attempts have given results which are consistent with the theory. In this note we show how the evolution of these studies reflects an attempt to deal with a fundamental methodological problem. The essence of all tests is to assume a functional form and level of aggregation of the factor inputs into a production function, estimate the function at the appropriate level of aggregation, and compare the resulting marginal products with the observed factor payments. Therefore, by necessity, all tests of the distribution theory are intimately linked to tests of the production theory. If estimated marginal productivities are not equal to factor payments, one can only conclude that the distribution theory or the production assumptions are wrong. A door is always left open to salvage either theory. This is the fundamental methodological problem.The only practical way of dealing with this dilemma is to agree on a fair test of the theory before the test is run. This is essential if the marginal productivity theory is to satisfy the criterion that a theory must be refutable. In this paper we offer the outlines of such a test so that it may be known and discussed before the test is performed.The paper is divided into five sections. Section 1 introduces our problem. Section 2 reviews recent attempts to take account of criticisms of previous tests. Section 3 reviews a method developed for dealing with the problem of multicollinearity which arises when several labour categories are introduced into the production function. We offer a qualification to this method and review some evidence which indicates that the qualitative results are not

Are Occupations Paid What They are Worth? An Econometric Study of Occupational Wage Inequality and Productivity

“…Comparing his estimation of marginal revenue products with median earnings, Gottschalk could not refute significant differences between productivity and earnings for a set of occupational groups (see Table 1), a finding later confirmed by Gottschalk and Tinbergen (1982). The overall conclusion of this study is that productivity differences appear to be inversely related to pay differences, a finding that has to our knowledge not been directly refuted in the empirical literature.…”

Are Occupations Paid What They are Worth? An Econometric Study of Occupational Wage Inequality and Productivity

“…The reference for empirical inter-occupational comparisons of productivity-wage differences remains Gottschalk's work from the late 1970s (Gottschalk, 1978). Comparing his estimation of marginal revenue products with median earnings, Gottschalk could not refute significant differences between productivity and earnings for a set of occupational groups (see Table 1), a finding later confirmed by Gottschalk and Tinbergen (1982). The overall conclusion of this study is that productivity differences appear to be inversely related to pay differences, a finding that has to our knowledge not been directly refuted in the empirical literature.…”

A New Approach to Testing Marginal Productivity Theory

“…A general discussion of methodological problems involved in testing marginal productivity theory is provided by Gottschalk/Tinbergen (1982). They list a number of possible issues such as different forms of aggregation problems or the difficulty to find the correct specification for the production function.…”