The Marginal Efficiency of Labour

The article introduces the Marginal Efficiency of Labour (MEL), an expectations-based metric adapted from Keynes's Marginal Efficiency of Capital. MEL is the expected internal rate of return on investment in labour, treating labour as an intertemporal asset whose value depends on firms' forward-looking expectations. MEL incorporates demand-side uncertainty through an expected realisability factor that captures anticipated future sales constraints, making firms' hiring decisions endogenous to expected revenue prospects rather than determined solely by current wages or productivity. To make the concept operational, the article derives a Tobin-style q-ratio for labour, a forward-looking measure that compares the expected profitability of hiring additional workers to the cost of labour, parallel to the q-theory used for physical capital investment. Unlike standard classical labour demand theory, MEL can explain persistent underemployment equilibria even when real wages are fully flexible; it also provides a testable empirical framework and a structural foundation for modelling hiring behaviour in modern Keynesian macroeconomics.