For many years economic theory has justified the pay of workers based on the revenue that each workers adds to the firm from their employment. This theory could be used to justify high banking salaries as each worker in the city bank on a trading floor adds creates a high amount of additional revenue for the business. The salaries of football are notably high with many in the top leagues earning hundreds of thousands of £ €’S a week, but how can this be justified? Each of the players in their own right and generates huge amounts of revenue for the clubs each week in the form of shirt sales merchandise etc. David Beckham moved to Real Madrid for a transfer fee of £24.5 million in 2003. The same day he generated over £25 million os shirt sales for his new employer. In that one day Madrid not only funded the cost of his transfer but benefitted of £500,000 additional (marginal) revenue to the business. Beckham was a revenue generating machine for his new employers over the years. Marginal Revenue Product theory suggests that workers should be paid based on the revenue each worker creates for his employer hence the high salaries in football and banking.
This theory has always been questioned as in some professions it is difficult to calculate the revenue produced by each worker. For example in teaching how do you calculate the revenue produced by a teacher or a school administrator? The theory can also been questioned by the role of monopsony buyers of labour especially in the public sector who have used their buying power to suppress wages in the public sector.
The role of monopsony is one that over years has been used to suppress public sector workers wages, the state’s buying power can be used to bid down wages for nurses, teachers, police, etc. Combined with years of austerity workers in the public sector have not enjoyed real terms increases in pay. Marginal revenue product theory has certainly not been applied in these essential areas for many years.
The Coronavirus has delivered many challenges indeed to the economy but it may now question and finish MRP theory off for good. As already mentioned it is difficult to measure the revenue of workers in the public sector, but it is this sector which is seeing the brunt of the work in the crisis. Doctors, nurses, ambulance staff are dealing with huge volumes of patients through the virus but they are not seeing any changes in their renumeration for the work they are doing at this time. Whilst they are not doing anything more than normal in saving lives they are saving the lives of many people who may normally be healthy citizens enabling them to return to work in the not too distant future. Those that have their lives saved will generate revenue and should some of this not be appropriated back to the health workers who saved lives? Is it time for MRP to be reapportioned in light of the crisis?
The crisis is not only affecting health care workers but those supporting the vital needs of citizens during the lockdown. The supermarket workers, the delivery drivers working in the gig economy other key workers looking after children at this time are all playing their role but they too are low paid and they are currently going and above and beyond to deliver vital services for people. In some cases business is booming such as Amazon and Tesco but the workers are certainly not benefiting from higher pay. They are still a cog in the machinery and the revenue they create is not being linked to better wages.
What is clear is that MRP theory might work where revenue can be directly apportioned to individuals but it does not work where a product cannot be linked easily to revenue generation. It is clear here that the low paid are creating the biggest value of output in our economy currently and MRP would suggest they should be paid much more. This is not happening and hence we need find a system for valuing the work of the low paid in line with their contribution to the wider economy without the need to monetarist revenue nor suppress wages through state monopsonies.
Econgreenwood 