Because of labour market frictions, the supply of labour to a firm does not fall instantaneously to zero if an employer cuts wages. This gives employers some monopsony power. In the absence of trade unions, minimum wages and efficiency wage considerations a profit-maximising employer will set a wage below the marginal revenue product of labour so that workers are, to use the terminology of Hicks and Pigou, exploited. This paper presents a method for computing the rate of exploitation. This method is then applied to a unique data set on workers in residential homes for the elderly on England's sunshine coast. We conclude that, on average, firms pay workers about 15% less than their marginal product.

---

Stephen Machin, Alan Manning and S Woodland

July 1993     Paper Number CEPDP0158