Essay Plans

Does the marginal productivity theory WORK?

SYNOPSIS:

POINTS:

  1. Define marginal productivity and explain MRP = MRP x Price (MR).

  2. Show how MRP curve (using ARP) is derived - diagrams.

  3. The marginal productivity theory of wages only determines the DEMAND side of the equation i.e wages are determined by Demand AND Supply of labour. Factors affecting supply of labour include size and age composition of the population, average working week, unemployment benefit, retirement age etc.

  4. Tackle the assumptions:-

    • Competitive market
      • If monopolies/monopsonistic market then MR is not the demand curve for the industry.
      • MC is not the supply curve.

    • MR, MPP can be calculated - MPP is often the product of the complementary factors, labour and capital. Not possible to calculate the marginal product.

    • Productivity (MPP) - not applicable to service sector.

    • Ignores collective bargaining/incomes policies.

    • Supply of labour may have a greater impact than the demand for labour eg unemployment.

    • Wage differentials may be further explained by market ignorance, factor immobility, discrimination (age, marital status, sex, colour).

    • Ignores role of non-monetary rewards - perks, fringe benefits.

    • A fall in wages may cause an employer to demand more labour BUT if wages fall throughout the economy, demand for labour increases (Keynesian critique).

    • Theory is circular : MRP depends on value of product; this depends on demand; demand depends on income; income depends on wages; wages depends on MRP.

  5. In conclusion : MRP emphasises productivity and final price of the product which explains - up to a point - the wage variations in an economy. Thus productivity may make wages self-financing.
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