Full text: Brief von Kurt Rothschild an Fabio Petri

October 2,1990 
Dear Professor Petri, 
Thank you very much for your interesting letter. I am sorry that 
we missed the chance to have a thorough discussion of the problems you 
raise. Unfortunately I have no manuscript of my task and there will be 
no publication. So let me answer your letter in a somewhat shorter way. 
First let me give you the references you are asking for. The diver 
gence between marginal productivity and wages is dealt with (on the basis 
of US data) in Lester C. Thurow, "Disequilibrium and the marginal pro 
ductivity of capital and labor", Review of Economics and Statistics, 
Vol.50,Nr.l(February 1968). The case of monopsony, which refers to firms 
and industries (not the entire economy), deals with rising marginal labour 
costs to a single or few firms which can influence wages by changing 
their demand. Fixing a uniform wage by trade unions inrtroduces constant 
marginal labour costs and this can lead to higher wages and higher employ 
ment through changing the market form. The source is Joan Robinsons Econo 
mics of Imperfect Competition, London 1933. Monopsony is also treated 
in my Theory of Wages, Oxford 1954. 
Let me now touch some of the other points you raise. The remark 
that "perhaps there is no proper supply function for labour" was partly 
meant to refer to the fact which you mention namely that entry and exit 
in the labour force is not independent of demand (as the statistics 
clearly show). But I also meant that the decision to enter the labour 
market is not dependent on the traditional economic determinants which 
we include in our models. Sociological and other factors also play a 
role. (I shall send you by separate post an article of mine which tries 
to show such non-economic factors in the development of female labour 
supply.) That the labour market can be pictured satisfactorily with the 
aid of supply, demand, and equilibrium is indeed questioned by many labour 
economists. A classical example is, by the way, John Hicks. In his famous 
Theory of Wages of 1932 he concentrated on such an equilibrium approach. 
But in the secon edition, which came out in 1955 he added an extensive 
critical part where he admits that this approach taken by itself is not 
The next problem is the passage that "it is not clear whether the 
real wage is determined by, or determines, the marginal product of 
labour". Two things are meant by this. The first is more important in 
poorer countries where a higher real wage improves the living standard 
and with it the capacity to work. To some extent this may also be true 
for modern countries where a higher standard may increase the psychic 
capacities (dealing with stress, learning, creativity etc. which are 
important elements in the modern production processes). But more important 
is perhaps the second point. If we start with the assumption that (1) 
managerial efficiency is not always 100% (X-inefficieny), and (2) that 
innovation is an ongoing process. Than a rise in real wages will on the 
one hand lead to substitution of capital for labour (reducing employment) 
but it will also trigger off allround improvements in the production 
function which can increase the productivity of labour and have a positive 
effect on employment. Certain points in this direction are, for instance

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