The Marginal Productivity Theory of wages provides an explanation of how wages are determined. According to this theory the rate of wage tends to become equal to the marginal product of labour.
Assumptions of Marginal Productivity Theory of Wages:
This theory is based on be following assumptions . 1. It assumes that there is perfect competition both in the goods market and factors market.
2. It assumes that all labourers are alike and are of equal efficiency.
3. It assumes that different factors can be substituted for one another.
4. It assumes that there is perfect mobility among factors.
5. It assumes that the law of diminishing returns is in operation.
6. It is assumed that it is possible to change the number of labourers only while keeping the other factors constant.
7. It assumes that there is full employment.
The theory is true only when the above assumed conditions exist. The marginal productivity theory of wages indicates the following major points
1 . The wage paid to the labourers depends upon their marginal productivity.
2. The wage paid to the labourers is equal to their marginal productivity.
If the marginal productivity of labour is greater than the wage rate, it is profitable to employ more labourers. The reason is increase in the value of total output will be greater than the increase in the total cost. As more labourers are employed, the marginal product of labourers diminishes after a certain stage. This happens because of the operation of the law of diminishing returns. So the producer becomes equal to the wage rate. The employer suffers loss if he employs more labourers. So, wage rate = marginal productivity of labour.
The marginal productivity theory of wages can be explained with the help of the following table:
In the above table the price of a product is assumed to be Rs. 1 and also the wage rate is Rs. 5/-. The above table shows two important concepts of productivity.
1. Marginal Productivity: The increase in the total product caused by employing one more labourer is called marginal productivity.
2. Marginal Revenue Productivity (M.R.P.) : It is obtained by multiplying marginal productivity with assumed price i.e. Rs. 1 /-. Whenever we speak of productivity it refers to revenue productivity. In the above table MRP is increased upto 5th labourer. From 6th labourer it is declining. Even though it is declining, it is higher than the wage rate upto fifth labourer. At 8th labourer wage rate = MRP. He can employ labourers upto 8th labour. After 8th labourer, he cannot employ. Because MRP is less than wage rate. So, he will be in equilibrium at 8th labourer where MRP = Wage rate. This can be illustrated with the help of the following diagram:
In this diagram the wage rate is assumed to be Rs. 5/-. It is same for all labourers. In the figure at 8th labourer the wage rate = MRP. He cannot stop employing the labourers before 8th labourer. If he stops, he can loose the chance of earning abnormal profits as MRP is greater than the wage rate. Beyond 8th labourer he cannot employ the labourers as MRP is less than wage rate. So, he stops at 8th labourer. Â Here he attains equilibrium as MRP=Wage rate.
Criticism of Marginal Productivity Theory of Wages:
The marginal productivity theory of wages has been criticized in the following aspects:
1. Not possible to increase only one factor : This theory assumes that it is possible to increase labourers keeping the other factors constant. But it is not possible to employ more labourers without changing the amount of capital or organization. For example, when we employ one more labourer, we must give him necessary tools, otherwise he may not be able to produce anything.
2. Full employment is not true : This theory assumes That there is full employment. It is not true. If there is unemployment, the labourer may accept a price which is less than his marginal productivity.
3. Diminishing returns can be checked : According to this theory, the law of diminishing returns operate in all sectors. But due to the increasing level of technology there is possibility of coming increasing returns as we are increasing numbers and size of capital.
4. Efficiency differ : This is theory assumes that all the labourers will have same and equal efficiency. But it is not true. Some labourers possess more efficiency and some other possess less efficiency.
5. Perfect substitution is impossible : This theory assumes that substitution is possible among the factors. But perfect substitution is impossible.
6. Perfect competition does not exist : It is not possible to find out perfect competitive market condition and also perfect mobility factors.
7. Not applicable to the short period : This theory is applicable only in the long run. It was criticized by Keynes for its long run assumption. He says “In the long run we are all dead”.
8. Not possible to find out marginal productivity of each factor:Â Taussing and Davenport criticized that a product is jointly produced by the four factors of production. Hence it is not possible to find out the marginal productivity of each factor separately.
We may conclude that it is not a theory that explains determination of wages. It simply explains how many labourers an employer will employ at a given wage level itself is determined.
