A New Approach to Measuring the Gap between Marginal Productivity and Wages of Workers

The idea that the productivity and wages of workers are not necessarily equal has long attracted the attention of many economists. Indeed, the lack of a method to measure the productivity-wage gap has hindered the development of research on labor economics, productivity analysis, and human capital study. This paper proposes a new empirical method to measure the gap between the value of a worker's marginal product (VMP) and wage. We first define this gap. The method then aggregates the Mincer-type function of each worker's human capital service to obtain the total labor input of a firm. The semi-log form of total labor input can be inserted into Cobb-Douglas and trans-log type production functions and enable expressing of the production function as a linear form of gap parameters. This linear functional form of production function, if applied to employer-employee matched panel data, can control for firm-level productivity differences that would otherwise cause biases in estimating the gap coefficients. We apply the new method to Japanese employee-employer matched panel data and find that the gap between the VMP and wage is not so large. The traditional way of measurement, in which wage acts as a proxy of worker productivity, could be a rough approximation.