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

Author Name KODAMA Naomi  (Consulting Fellow, RIETI) /ODAKI Kazuhiko  (Senior Fellow, RIETI)
Creation Date/NO. May 2012 12-E-028
Research Project Research on Productivity Growth in Service Sector
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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.