I have heard people, usually non-economists, argue that a person or a country is being exploited in an economic relationship. Consider the following example. Under the Seasonal Agricultural Workers Program, temporary Mexican migrants are employed on fruit, vegetable and tobacco farms in Ontario, Canada. Some have claimed that they are exploited because they are underpaid. If these migrants get paid more in Canada than in their next best alternative job in Mexico, in what sense are they being exploited? One also hears complaints that the less developed countries are exploited by the developed countries in international trade. To investigate this matter, suppose a worker contributes V dollars of output to a firm. Let B be his salary in his current job, and C be his salary in his next best job (i.e., opportunity cost), where V > C. I want to explain the economic circumstances under which this worker may be paid less than V dollars and when he may be paid V dollars. I shall then discuss whether exploitation has any meaning in economics.

It is important to note that the worker must be paid, at least, his opportunity cost, C, for him to work at this firm. Otherwise, he will take his next best alternative job, which also pays C dollars.

Suppose B = V > C. Then the worker gets a surplus of V – C > 0. He earns a salary above his opportunity cost. If there are several other workers who possess similar skills, then competition amongst these workers will drive the salary down to C. On the other hand, if there is a sufficiently small number of workers with similar skills, then competition among the workers will not drive the salary down to C. Indeed, it could be equal to V.

So far we have focused on the competition amongst workers of similar skills. Alternatively, let’s focus on competition among the firms who want the services of this worker. Suppose B = C < V. Then he earns exactly his opportunity cost. Suppose there are several firms who require this worker’s services. Then as the firms compete for him, this will drive his salary up to B = V.

Therefore, if there are fewer sellers and several buyers in a labor market, then a worker in this market is likely to earn close to V. Otherwise, if there are several sellers he is likely to earn very close to C < V.

Finally, if there is incomplete information, so that a worker’s effort cannot be perfectly monitored or observed, then the worker may be paid an efficiency wage or salary B > C, where B may be very close to V, even if there are several workers who possess similar skills. In this case, competition amongst the workers cannot drive the worker’s salary to C. To see this, suppose B > C. Then another worker with a similar skill is willing to work for a salary slightly lower than B but still greater than or equal to C. If the firm could easily monitor this worker’s effort, then it will hire this worker at a lower salary. As the workers undercut each other in the labor market, the equilibrium salary will be driven down to C. On the other hand, if the worker’s effort cannot be fully monitored, then it is optimal to pay the worker more than his opportunity cost, C. To see this, suppose the worker was paid B = C. Then since the worker’s effort cannot be fully monitored, he is likely to exert very minimal effort (e.g., fool around at the workplace, spent too much time during lunch break, etc). If he gets caught and fired, he doesn’t really care since, by definition, he can get another job (i.e., his next best alternative) that is just as good as his current job from which he was fired. Recall that his next best job also pays a salary of C. Hence, firing the worker is costly to him if his current job pays B > C, where B could be close to V. Then to avoid being fired, the worker will exert an effort greater than the minimum effort. So it is competition and information which determine whether a worker who produces V dollars of output is paid V or less than V.

If the worker contributes V to the firm, then we can think of this as the value of output to the firm after the firm has netted out all the costs of production except the worker’s salary. Notice also that, in some cases, if the firm had not provided other complementary factors like capital, the worker would not have been able to produce V. Since V is the value of the worker’s output to the firm minus the costs of production other than wages, and C is the cost to the worker of entering into this economic relationship with the firm, we may define the total surplus or profit of this relationship as V – C. Then for any given salary, B, we can define V – B as the surplus to the firm and B – C as the surplus to the worker. The sum of the worker’s surplus and the firm’s surplus is (V – B) + (B – C) = V – C. Therefore, the choice of B determines how the total surplus - generated by the economic relationship between the firm and worker - is shared or distributed. If B is very close to C, then the worker’s surplus, B – C, is very close to zero. Therefore, the firm gets almost all of the total surplus. On the other hand, if B is very close to V, then the firm’s surplus, V – B, is very close to zero. Therefore, the worker gets almost all of the total surplus.

Based on the preceding analysis, one may argue that a worker who gets paid significantly less than what he actually contributes is being exploited or exploitation occurs when the firm gets an unfair share of the total surplus. Therefore, exploitation has to do with the distribution of the total surplus generated from the economic relationships between firms and workers (i.e., labor and capitalists). And the distribution of this surplus is usually the source of conflict between workers (e.g., labor unions) and the owners/managers of firms. The distribution of surplus is also the source of disputes between or among countries in trading relationships and between pro-trade liberalization and anti-trade liberalization factions in a given country. It is also at the heart of immigration policy since immigration affects the bargaining power of firms and workers. The distribution of surplus is at the heart of all economic relationships and policies. In Adam Smith's world of perfect competition, exploitation cannot arise because no one can obtain a positive surplus (i.e., abnormal profit). In the real world, firms indeed make abnormal profits.

So far, I have assumed that the size of the total surplus is fixed. Indeed, the distribution of the surplus can affect the size of the surplus. For example, consider the discovery of oil or a lucrative natural resource. The unfair distribution of the surplus stemming from the exploration of these natural resources has led to wars in Sierra Leone, Nigeria, Angola, etc

To conclude, the degree of exploitation is higher, the higher is the degree of competition (i.e., the higher is the number of workers who possess similar skills). In economics, it is competition and markets that determine value. There is nothing like the intrinsic or the immutable value of a thing because the value of the same object changes with circumstances (i.e., degree of competition).

*The author, J. Atsu Amegashie, teaches economics at the university of Guelph, Canada.