Recent Theories of wages

Recent Theories of wages

The Marginal productivity theory of wages : The marginal productivity theory of wages is only an application of the marginal productivity theory of distribution, which is a general theory of distribution. The theory explains how wages are determined under conditions of perfect competition. According to the marginal productivity theory, wages will be equal to the value of the marginal product of labour.

As an employer goes on employing more and more units of labour, its marginal product will fall because of the law of diminishing marginal returns. So he will employ labour upto the point where the wages he pays are equal to the value of the marginal product of labour. All units are assumed to be uniform. So the productivity of the marginal unit of labor determines the rate at which wages are to be paid to all units of labour.

Criticism :1. Every product is produced by the joint effort of all factors of production. It is rather difficult to measure the productivity of each factor in terms of the product produced. The difficulty is more in measuring the marginal productivity of those who render services (eg. doctors, actors and lawyers) ; 2. it is based on the assumption of perfect competition. But in the real world, we have only imperfect competition ; 3) under monopoly, wages will be lower than the marginal product of labour because there is exploitation of labour ; 4) wages are in the nature of advance payment. So an employer will deduct some amount to cover the interest on capital and pay the workers wages which are lower than their marginal product. So wages are the discounted marginal product of labour 5). The theory should not be used to justify the low wages in an economy and the inequalitites of incomes. Wages might be low because of exploitation of labour. In spite of the above criticism, 'the doctrine throws into clear light the action of one of the causes that govern wages'. (Marshall).