Labor-labor power=surplus value

There is a clear distinction between labor and labor-power. "Labor" refers to the actual activity or effort of producing goods or services (or what Marx calls usevalues). Neoclassical economists sometimes refer to this as "labor services." On the other hand, "labor-power" refers to a person's ability to work, his or her muscle-power, dexterity and brain-power. Marx took over this distinction from Hegel's Philosophy of Right and gave it a new significance. In some ways, this concept is similar to that of "human capital". However most likely Marx himself would have considered the concept of human capital a reification, the purpose of which was to convince the worker that he was really a capitalist. "Apologetic economists... say... [The worker's] labor-power, then, represents his capital in commodity-form, which yields him continuous revenue. Labor-power is indeed his property (ever self-renewing, reproductive), not his capital. It is the only commodity which he can and must sell continually in order to live, and which acts as capital (variable) only in the hands of the buyer, the capitalist. The fact that a man is continually compelled to sell his labor-power, i.e., himself, to another man proves, according to those economists, that he is a capitalist, because he constantly has “commodities” (himself) for sale. In that sense a slave is also a capitalist, although he is sold by another once and for all as a commodity; for it is in the nature of this commodity, a laboring slave, that its buyer does not only make it work anew every day, but also provides it with the means of subsistence that enable it to work ever anew." - Marx, Marx distinguishes between labor power and labor. "Labor-power" is the potential or ability of workers to work, given their muscles, brains, skills, and capacities. It is the promise of creating value possessed by human labor that has not yet been expended. "Labor" is the actual activity of producing value. The profit or surplusvalue arises when workers do more labor than is necessary to pay the cost of hiring their labor-power.

Marx's solution was to distinguish between labor-time worked and labor power. A worker who is sufficiently productive can produce an output value greater than what it costs to hire him. Although his wage seems to be based on hours worked, in an economic sense this wage does not reflect the full value of what the worker produces. Effectively it is not labor which the worker sells, but his capacity to work. Imagine a worker who is hired for an hour and paid $10. Once in the capitalist's employ, the capitalist can have him operate a boot-making machine using which the worker produces $10 worth of work every fifteen minutes. Every hour, the capitalist receives $40 worth of work and only pays the worker $10, capturing the remaining $30 which, after deduction of costs (the leather, depreciation of the machine, etc.) leaves a residual, i.e. surplus value or profit. The worker cannot capture this benefit directly because he has no claim to the means of production or to its products, and his capacity to bargain over wages is restricted by laws and the supply/demand for wage labor. Hence the rise of trade unions which aim to create a more favorable bargaining position through collective action by workers. Labor power is a peculiar commodity, because it is an attribute of living persons, who own it themselves. Because they own it, they cannot permanently sell it to someone else; in that case, they would be a slave, and a slave does not own himself. Labor power can become a marketable object, sold for a specific period, only if the owners are constituted in law as legal subjects who are free to sell it, and can enter into labor contracts. Once actualized and consumed through working, the capacity to work is exhausted, and must be replenished and restored. In general, Marx argues that in capitalism the value of labor power (as distinct from fluctuating market prices for work effort) is equal to its normal or average (re-)production cost, i.e. the cost of meeting the established human needs which must be satisfied in order for the worker to turn up for work each day, fit to work. This involves goods and services representing a quantity of labor equal to necessary labor or the necessary product. It represents an average cost of living, an average living standard.

Included is both a physical component (the minimum physical requirements for a healthy worker) and a moral-historical component (the satisfaction of needs beyond the physical minimum which have become an established part of the lifestyle of the average worker). The value of labor power is thus an historical norm, which is the outcome of a combination of factors: productivity; the supply and demand for labor; the assertion of human needs; the costs of acquiring skills; state laws stipulating minimum or maximum wages, the balance of power between social classes, etc. Buying labor power usually becomes a commercially interesting proposition only if it can yield more value than it costs to buy, employing it yields a net positive return on capital invested. However, in Marx's theory, the value-creating function of labor power is not its only function; it also importantly conserves and transfers capital value. If labor is withdrawn from the workplace for any reason, typically the value of capital assets deteriorates; it takes a continual stream of work effort to maintain and preserve their value. When materials are used to make new products, part of the value of materials is also transferred to the new products. Consequently, labor power may be hired not "because it creates more value than it costs to buy", but simply because it conserves the value of a capital asset which, if this labor did not occur, would decline in value; or because it transfers the value of a capital asset from one owner to another. Marx regards such labor as "unproductive" in the sense that it creates no new value, but it may be absolutely essential and indispensable labor because without it a capital value would reduce or disappear.