Вы находитесь на странице: 1из 2

Marginal Productivity Theory of Wages

The concept of marginal productivity theory of wage was first developed by economists like
Ricardo & west. J.B. Clark is widely associated with the development of this theory. According
to this theory, wages are determined by the marginal productivity of labor. In other words, labor
is paid on the basis of its marginal productivity. Marginal productivity implies the working
capacity of an additional unit of labor employed by the firm.
Assumptions:
 There is perfect competition in market.
 The number of employers & workers are very large.
 Technology remains constant.
 Labor is homogeneous & perfectly mobile.
 Firms try to maximize profit.
 Law of diminishing return is applicable.
On the basis of the above assumptions, the equilibrium condition can be expressed as:
Demand for labor(DL) =Supply of Labor(SL)

Demand for Labor(DL)


The value of marginal productivity of labor(VMPL) is the demand curve of labor. Under perfect
competition market, wages are determined by the value of marginal productivity of labor. The
value of marginal productivity of labor is the product of marginal productivity of labor(MP L) and
price(P).
i.e., VMPL = MPL. PX
Due to the law of variable proportions, MPL declines at higher level of employment. The VMP L
curve is downward slopping because price is multiplied by diminishing MPL.

Supply of Labor(SL)
The supply of labor is the cost side of the firm. Due to constant wage rate, the S L curve is constant,
it is equal to the marginal cost of labor (MCL).
In a perfectly competitive labour market, where the wage rate is determined in the
industry, rather than by the individual firm, each firm is a wage taker. This means that the
actual equilibrium wage will be set in the market, and the supply of labour to the individual
firm is perfectly elastic at the market rate.

̅ = MCL = SL
𝑊

Now, the objective of firm is profit maximization. This situation is attained when:

DL= SL
VMPL =MCL
This can be shown in the following fig.

E
Wage

ത𝑾
തത SL
=MC

VMPL
In the figure, ‘E’ is the equilibrium point where VMPL & SL are equal with each other which
determines equilibrium wage rate O𝑊 ̅ and employment equilibrium 0Le. To the left of Le units of
labor, VMPL is greater than the wage rate so that it is better for the firm to increase employment
of labor up to Le. On the other hand, to the right of Le, VMPL is less than wage rate so that firm
should reduce the employment of labor up to Le in order to maximize profit.
Thus, according to marginal productivity theory, the wage rate is determined by the forces of
demand & supply of labor. This wage is equal to the value of marginal productivity of labor.

The supply curve of labour in a competitive market

In a perfectly competitive labour market, where the wage rate is determined in the
industry, rather than by the individual firm, each firm is a wage taker. This means that
the actual equilibrium wage will be set in the market, and the supply of labour to the
individual firm is perfectly elastic at the market rate.

Equilibrium wage in the labour market, and supply for the individual firm.

Вам также может понравиться