Some years ago when I was Business Week’s columnist an up-and-coming academic economist published his conclusions that raising the minimum wage did not cause unemployment. An implication was that labor unions did not cause unemployment by forcing up wages.
These conclusions flew in the face of economic theory. Theory held that employees were paid the value of their marginal product. The value of the marginal product of labor is a measure of labor’s contribution to the firm’s revenues. As a factory, for example, increases its work force, after initially rising the contribution of each additional employee to output falls. Think of it in this way. As the work force expands, the fixed size of the factory means that additional workers have less technology and capital per capita with which to work.
Thus after some point the marginal product of additional workers falls. The value of the worker’s marginal product is his output times the price of the product.
Translated that means that
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