Exploitation

MARXISTS TRADITIONALLY DEFINE exploitation as the condition where the value of labor a worker can purchase with the income received for his labor is less than the value of labor performed. This concept rests on the labor theory of value, which states that a good's value is determined by the amount of labor used to create the good. Thus, there are two forms of labor: labor contained within the worker (potential labor) and labor contained within goods (embodied labor). Individuals who exert more labor than they can purchase with their wage income are exploited. Those who can purchase more labor with their income than they expend are exploiters. These two groups are typically referred to as laborers and capitalists, respectively. Thus, the concept of exploitation provides the basis for class analysis and class struggle in the Marxian literature.

Arthur Pigou provided a definition of exploitation that is more commonly used in mainstream economic analysis. In his definition, the degree of exploitation is measured by the percentage deviation of a worker's marginal revenue product from his wage. A worker's marginal revenue product is the value (in terms of revenue) of the increased output produced when that worker is added to the production process. In a perfectly competitive labor market, the wage is equal to the marginal revenue product. This condition arises because the firm takes the wage as given; the market sets it. The firm then employs labor until the marginal revenue product of the last hour worked is equal to the market wage. Thus, there is no exploitation in competitive labor markets. Exploitation arises when the firm exerts market power in the labor market. This type of firm is said to possess monopsony power (the term monopsony comes from the Greek, meaning “single buyer”). There are several potential sources of monopsony power; however, the classical example is the company town. This case arises when a single firm is the major employer in an isolated town or region.