The Marginal Productivity Theory Explaining Wage Determination in Real Life
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The Marginal Productivity Theory Explaining Wage Determination in Real Life

The marginal productivity theory explaining wage determination in real life Several theories have been put forward by economists as an explanation of the prevalent rates of wages. But most of these theories have been rejected as being partial or unsatisfactory explanations. One well-known theory is the marginal productivity theory.

The marginal productivity theory explaining wage determination in real life

Several theories have been put forward by economists as an explanation of the prevalent rates of wages. But most of these theories have been rejected as being partial or unsatisfactory explanations. One well-known theory is the marginal productivity theory.

The marginal productivity theory states that under perfect competition, every employee of same ability and competence in a given group will collect a wage equivalent to the worth of the marginal creation of that category of labor.

We may state that the marginal product of labor in any business is the total by which the productivity would be amplified if one more worker was employed while the magnitudes of other aspects of production employed in the industry re-named constant. In short, it is the output attributed to a single worker unaccompanied by any change in other factors of production. The value of the marginal product of labor is the price at which the marginal product can be sold in the market.

Under conditions of perfect competition, an employer will go on hiring labors until the worth of the product of the final laborer he hires is equivalent to the marginal or supplementary cost of hiring the final worker. Added, the condition of perfect competition implies that the marginal cost of labor is always equivalent to the wage charge, irrespective of the workers hired. Every industry being ultimately subject to law of diminishing returns, this marginal product must begin reducing at some point. Labor Wages not changing, the manager stops hiring workers at that position where the worth of the marginal product of a worker is equivalent to the wage charge.

So far we have assumed that the magnitudes of other aspects don’t change while that of labor only amplifies. This, though, is not exact; factor magnitude amplifies all-round though this may not be factual in the short run.

The theory may thus finally be re-stated as follows: Under conditions of perfect competition in the labor market and in the market for the products of the industry, and irrespective of the number employed, every worker will receive a wage equal to the value of marginal net product of his labor.

 

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