Marginal productivity theory of wages

The marginal productivity theory of wages is nothing but an application of the marginal productivity theory of distribution. This theory was put forth by jevous in the 19th century. The theory tells how wages would be determined under conditions of perfect competition. According to this theory, the wages of the workers tend to be equal to the value of their marginal productivity. In the short period, the wages may be more or less than marginal productivity but in the long period the wages must equal the value of the marginal productivity of labour.

Assumption

1. The theory is based upon the following assumptions.

2. There is perfect competition in the labour market.

3. Labour is homogeneous.

4. Labour and capital are perfectly mobil.

5. There is full employment of labour in the economy.

6. One unit of labour can be substituted for another unit of labour.

Determination of wages

The market is in equilibrium when the wages are equal t the average and marginal productivity of labour. This is shown in the diagram.

In the above diagram x axis represents number of workers and y axis represents wages. The market is I equilibrium when OM men are employed and wage rate is OW. At the equilibrium point 'E'. Average revenue productivity and marginal revenue productivity wages are equal. Since this theory considered all the units of labour homogeneous, the producer will pay the same wages. Thus according to this theory the wages shall neither be above nor below the marginal productivity of labour in the long period.

Criticism

1. According to this theory, the wages can neither be less not more than the marginal productivity of labour.
2. The theory assumes perfect competition. But in the real world imperfect competition is the general rule.
3. This theory assume that all the units of labour are homogeneous. But as me know this assumption is wrong. Workers often differ from each other from the point of view of efficiency and productivity.
4. The theory does not carry with if any ethical justification. It may be used low became productivity is low. But exploitation of labour might also be a main cause of low wages.
5. It is untrue that there is full employment in the economy we see large scale unemployment in most of the under developed economies.
6. It is pointed out by the critics that this theory offers only a long term explanation of the determination of wages. It throws no light on the determination of wages in the short period.

Lastly it does not pay much attention to influences activity on the supply side. Nevertheless, the marginal productivity theory explains the role of productivity in the determination of wages. As marshall puts is the doctrine throws in to clear light the action of one of the causes that govern wages. The marginal productivity theory was very theory is simply, a theory of one aspect of the demand for productive service by the firm.