How do We Value Labor?

Pam Sornson, JD

The economic and workforce development sector constantly evolves as technology, social concerns, and an aging population disrupt a century of labor and economic traditions. While some occupations have remained steadily in demand, others have become obsolete, and still others have been newly generated. The state of constant flux in workforce modernization is now forcing changes in how society identifies the value of the labor necessary to keep it running. However, establishing new definitions for that (or those) value(s) is a challenge because there are so many variables involved in the activities described as ‘labor’ and an equal or greater number of outcomes that those activities produce.

Aspects of ‘Labor’

Defining the value of labor is an economic practice to establish how and why goods are exchanged for currency or other products. Some form of work or effort is needed to produce any product or service, and the laborers who make that effort expect some form of compensation from the consumers who receive it. The question is how to set a ‘reasonable’ compensation value for that effort.

Several notable theories attempt to explain appropriate methodologies for defining the value of labor, many of which center on the production of products or the value of the end product:

‘Labor Theory’ of Value

An early theory focused on the measurement of hours needed to produce a single instance of a commodity. This theory suggests that an item’s value should be determined by how many hours a worker invested in creating that product. This value is described as the “natural price” of the commodity but does not take into account the materials that were also invested in the production process. Subsequently, this labor theory was extended to include the value of those included materials, which was also valued based on their production cost. Those expenditures were added to the end product’s development cost. Economists set the value of the labor expense using a price/hour ratio and measured the value of the materials by the expense incurred creating or extracting them from their source.

Labor Supply and Demand Theory

The simple labor theory becomes skewed when third parties control the labor force, materials supply, and production facilities and can set arbitrary prices for those assets and the products they collectively generate. When any individual production asset – materials, workforce, or facility – is in short supply and limits the availability of the end product, the price of those products can go up. Businesses struggling to maintain their revenue streams due to a lack of staffing, for example, often increase the wage per hour value to attract that workforce asset, which may then also cause their product prices to rise. Further, emerging skill sets, such as technical expertise or complex problem solving, are also considered ‘valued’ elements of the product. They can add considerable proprietary values to the commodity and command a higher value per hour as more companies compete for that resource. The value of labor, in this case, is based on the type of labor offered and its volume as an available resource in the community.

‘Product Value’ Theory

Another way to define the value of labor is to attach it to the value of the product it produces, and in many cases, the value of that product is also relative based on its contribution to its consumer. Products designed and built to fulfill specific corporate or personal needs can fetch high prices in the marketplace when they successfully achieve those goals. Value-based product development practices focus on clarifying those specific consumer goals and then creating items that directly respond to those mandates. This process includes the selection of labor skills and abilities needed to create and produce the desired outcome, from its ideation to its ultimate creation. Producers whose products or services require precise skill sets will place a high value on that well-trained labor force and compensate those workers accordingly. Conversely, the labor needed for mundane or routine tasks is both more available and less taxing, so compensation for those activities is often much lower.

Other factors considered and establishing product value through a value-based development process include:

The size of the market for that product. Products that promise high popularity across populations will be valued more at that community level than those items designed for smaller, more distinct groups of consumers.

Demand for the product. Items that respond to the needs of many purchasers will be more popular than those developed again for more precise groups of consumers.

The value of the inputs to create that output. Companies with existing facilities and workforces can produce new products more quickly and at less cost than organizations that must first build out that infrastructure.

This economic theory sets the value of ‘labor’ based on end product value.

‘Service Value’ Theory

Valuing the labor involved in service performance is challenging, too. Services are transitory; they are the short-lived experiences of human engagement for specific purposes. Setting their price based on the time elapsed during their delivery doesn’t adequately capture the value they provide.

And services provide significant value to the community. In the third quarter of 2022, the U.S. Gross Domestic Product (GDP) value of services industries totaled over $14 trillion, up from just $9.7 trillion in 2005. Those industries span the full extent of the economy, including numerous health care services, food services and drinking places, data management and IT services, and legal services, to name just a few. In 2020, the “miscellaneous services industries” (professional, technical, and scientific services industries) added close to one trillion dollars to the American economy ($975 billion).

Each of these theories attempts to capture the economic benefits conferred by labor production on the community to the worker, the employer, and the consumer. In the following article, the Pulse will discuss the social value of labor and how “work” enhances the overall value of society.