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The Marginal Efficiency of Labor

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  • Biagio Bossone

Abstract

Drawing on Keynes’s concept of Marginal Efficiency of Capital (MEC), this article introduces the Marginal Efficiency of Labor (MEL) as an expectations-based valuation metric for understanding labor demand under uncertainty. MEL is defined as the internal rate of return on labor investment, reflecting firms’ expectations about the realizable monetary value of labor’s output relative to its full cost. Unlike the marginal product of labor (MPL), MEL treats labor as an intertemporal asset and incorporates demand-side constraints via an expected realizability factor, thereby endogenizing firms’ hiring decisions to future sales prospects. To make MEL operational, the article derives a Tobin-style q for labor—a forward-looking ratio that expresses the profitability of hiring labor relative to its cost, mirroring the investment logic used for capital. The article formally develops MEL, compares it with classical labor demand, and shows how it explains persistent underemployment equilibria even under real wage flexibility. MEL offers a testable empirical agenda and a structural foundation for modeling hiring behavior in modern Keynesian macroeconomics.

Suggested Citation

  • Biagio Bossone, 2025. "The Marginal Efficiency of Labor," Working Papers PKWP2518, Post Keynesian Economics Society (PKES).
    • Handle: RePEc:pke:wpaper:pkwp2518
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    File URL: https://postkeynesian.net/media/working-papers/PKWP2518.pdf
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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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