Recent Theories of wages

Recent Theories of wages:

The Marginal productivity theory of wages:

The marginal productivity theory of wages is merely an application of the marginal productivity theory of distribution that is a general theory of distribution. The theory elucidates how wages are determined under circumstances of perfect competition. According to the marginal productivity theory, wages will be equivalent to the value of the marginal product of labor.

Since an employer goes on utilizing more and more units of labor, its marginal product will drop since of the law of diminishing marginal returns. Therefore he will utilize labor up to the point where the wages he pays are equivalent to the value of the marginal product of labor. Every unit is supposed to be uniform. Therefore the productivity of the marginal unit of labor determines the rate at which wages are to be paid to each units of labor.

Criticism:

1. Each and every product is generated by the joint effort of all factors of production. This is rather hard to evaluate the productivity of each factor in terms of the product generated. The difficulty is more in evaluating the marginal productivity of those who render services (example, doctors, actors & lawyers);

2. It is based on the supposition of perfect competition. However in real world, we have only imperfect competition;

3) Under monopoly, wages will be less than the marginal product of labor since there is exploitation of labor;

4) Wages are in the nature of advance payment. Therefore an employer will remove some amount to cover the interest on capital and pay the worker’s wages that are lower than their marginal product. Therefore wages are discounted marginal product of labor

5) The theory must not be employed to justify the low wages in an economy and the in-equalities of incomes. Wages may be low since of exploitation of labor. Despite of the above criticism, “the doctrine throws in clear light the action of one of the causes which govern wages”.

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