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

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  • KODAMA Naomi
  • ODAKI Kazuhiko

Abstract

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.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 12028.

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Length: 30 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:eti:dpaper:12028

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  1. ODAKI Kazuhiko & KODAMA Naomi, 2010. "Stakeholder-Oriented Corporate Governance and Firm-Specific Human Capital: Wage analysis of employer-employee matched data," Discussion papers 10014, Research Institute of Economy, Trade and Industry (RIETI).
  2. Kyoji Fukao & Ryo Kambayashi & Daiji Kawaguchi & Hyeog Ug Kwon & Young Gak Kim & Izumi Yokoyama, 2006. "Deferred Compensation: Evidence from Employer-Employee Matched Data from Japan," Hi-Stat Discussion Paper Series d06-187, Institute of Economic Research, Hitotsubashi University.
  3. Pekka Ilmakunnas & Mika Maliranta & Jari Vainiomäki, 2004. "The Roles of Employer and Employee Characteristics for Plant Productivity," Journal of Productivity Analysis, Springer, vol. 21(3), pages 249-276, May.
  4. James L. Medoff & Katharine G. Abraham, 1980. "Experience, Performance, and Earnings," NBER Working Papers 0278, National Bureau of Economic Research, Inc.
  5. Bruno Crépon & Nicolas Deniau & Sébastien Pérez-Duarte, 2003. "Wages, Productivity and Worker Characteristics : A French Perspective," Working Papers 2003-04, Centre de Recherche en Economie et Statistique.
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