Labor Productivity and Wage Relations in the Middle East and North Africa (MENA)

The aim of this study is to test labor productivity-wage relations for those MENA countries the data of which are available. Classical and modern economic theories relate the determination of wages directly or indirectly to labor productivity. The theory of wages, which directly establishes a relationship betweenthe labor productivity and wages is the marginal productivitytheory of wage determinationdeveloped by Phillips H. Wicksteed and John Clark. According to this basic model of classical and neoclassical schools of economics, wages are determined in accordance with the marginal labor productivity, that is, the contribution of the last worker to the production. Thus, the main determinant of the share of the labor in total production is the labor productivity.On the other hand, the wage fund theory brought forward by Adam Smith who is regarded as the founder of economics as an independent science, argues that the size of the wage fund created by saving is the determinant of both labor demand and wage. While this theory does not directly link the wage rate to productivity, the labor productivity along with other factors of production determine the size of the wage fund. The theory of subsistence wage put forward by David Ricardo suggests that the labor forceshould be paid enough to live on. This wage theory foresees a wage that will enable the labor force to work efficiently; however, it does not include the reflection of the labor productivity. Bargaining theory, which can be assessed in Keynesian tradition and developed by John Davidson, suggests that the wage depends on the level of unionization of the laborforce and the level of organization of the employers (employers’ organizations) and the bargaining between the laborforce and the employer as determined by the competitive structures of the commodity and factor markets. One of the factors determining the bargaining power of labor organizations within the framework of this theory is the labor productivity. Modern wage theories are built on the behaviours of the employer and the laborforce and are thus called behavioural wage theories. These theories establish a direct relation between wage and labor productivity.The surplusvalue theory put forward by Karl Marx suggests that the wage is below the productivity of the laborforce and the difference between the given values constitutes a surplus value, and that it is confiscated by the capitalist. As to the theory of wages developed by Francis A. Walker, it suggests that after the share of the capital, natural resources and entrepreneur is paid, the residual is given to the laborforce.

The results of our empirical findings can be summarized as follows: There is a long-term positive relationship between the broadly defined wage rate and the average productivity in the economy. This means that the increases in labor productivity in these economies are reflectedin wage increases in the long run and thus increase the welfare of employees. However, a positive and meaningful relationship in the short term is only the casefor Israel and Turkey. This can be explained by the fact that these economies are more diversified, especially that their industrial sectors are more open to technological developments and they have more institutional labor markets. The fact that the Israeli and Turkish economies are more market-based economies than the other economies covered, and thus the prices of goods and services and the factors production are determined by the demand and supply conditions at the relevant markets, reveals the existence of both short and long term relationships between average productivity and wages in these economies. The political economic consequence of the empirical finding of the study is that the reflection upon the welfare of the employees of the structural reforms that will increase the productivity of the laborforce in the MENA countries in the long run will contribute to the provision of social peace and stability, and therefore governments should invest in the physical and human capital and institutional development of the economies which will increase their labor productivity.