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Marginal Productivity Theory of Wages

The document discusses the marginal productivity theory of wages, which states that a worker's wage is determined by their marginal productivity or contribution to total output. It outlines the theory's assumptions, that wages equal the value of marginal product, and criticisms of the theory, such as its unrealistic assumptions of perfect competition and full employment.

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127 views

Marginal Productivity Theory of Wages

The document discusses the marginal productivity theory of wages, which states that a worker's wage is determined by their marginal productivity or contribution to total output. It outlines the theory's assumptions, that wages equal the value of marginal product, and criticisms of the theory, such as its unrealistic assumptions of perfect competition and full employment.

Uploaded by

Shadow Naruto
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MARGINAL

PRODUCTIVITY
THEORY OF
WAGES
HITESH M
21LUL11013
THEORY - INTRO
 The marginal productivity theory of wage states that the price of labour, i.e., wage rate, is
determined according to the marginal product of labour. This was stated by the neo­classical
economists, especially J. B. Clark, in the late 1890s.
 According to this theory, the price of a factor of production (labour) depends upon its marginal
productivity. A factor of production should get its reward according to the contribution it
makes to the total output, i.e., its marginal productivity. Change in the revenue resulting from
the employment of an extra unit of the factor (labour) is called Marginal Revenue Product
(MRP) or Value of Marginal Product (VMP) and the change in total cost brought about by
using an extra unit of the factor is called Marginal Factor Cost (MFC).
ASSUMPTIONS
 It assumes the existence of perfect competition.
 All labourers are homogenous in character.
 The theory is based on the law of diminishing marginal returns / productivity.
 It assumes that different factors can substitute each other.
 The firm aims at profit-maximization.
 Resources are fully employed.
 In factor market (labour market), a firm’s equilibrium occurs when MRP=MFC. In product
market, a firm’s equilibrium will be at MR = MC (MR is the Marginal Revenue and MC is the
Marginal Cost).
 Marginal productivity theory of wage states that wage of labour equals VMP L (= MRPL).
Employer will employ labour up to the point until market wage equals labour’s value of the
marginal product (VMP) and marginal revenue product (MRP).
CRITICISMS
 In the real world, perfect competition does not exist.
 Labour can never be homogeneous.
 Perfect mobility of labour is another unrealistic assumption.
 The marginal productivity theory of wage ignores the supply side of labour and concentrates
only on the demand for labour.
 Full employment of resources is another unrealistic assumption.
 This theory, in fact, is not a wage theory but a theory of employment. Wage rate is
predetermined.
 Finally, this theory ignores the usefulness of trade union in wage determination.
CONCLUSION
 Marginal Productivity Theory of Wages states that an individual's wage is determined by the
marginal contribution of their labor to the overall productivity of the firm or economy.
According to this theory, workers are compensated based on the value they add to the
production process, with wages reflecting their marginal productivity.

THANK YOU

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