Economic theory tells us that, in a perfectly competitive labor market, labor should be paid according to its “marginal product.” Now, without the jargon: The last workers to be hired by a business should receive pay that is equal to their contribution to the output of that business. So, let’s compare the data with the theory… Unfortunately, we have no data on the marginal product. But fortunately, we have data on average product. Although it’s not a certainty, these two products should be correlated. So, the graph above shows real growth rates for average product and the average wage. But again, there’s a limitation ... (full story)