MARGINAL PRODUCTIVITY THEORY OF WAGE
The marginal productivity theory states that “Under perfect competition of every worker of the same skills and efficiency in a given category will receive wages equal to the marginal product of the labour.
The theory operates under the following assumptions;-
- It assumes that labour is homogeneous.i.e they are the same in skills, efficiency, abilities, etc.
- Factors of production i.e. labour can be substituted for each other perfectly.
- The theory assumes that wage levels and labour productivity are independent. This is not necessary valid. Increased wages may be call for extra efforts from the labour force so that productivity increases.
- It’s not always possible to separate the marginal contribution of each labour in the production.
- There are other factors than marginal product which determine reward for labour in production.
- SUBSISTENCE THEORY OF WAGES
This is so called “Iron law of wages”. It states that,” if wages rises above subsistence level increased in population is inevitable follows and this forces wages down to subsistence level”.
This theory was rejected due to the following;-
- It is not realistic, because it is not necessary that the increase in wages must lead to the increase in population.
- The theory does not explain the inequity of wages in different occupations and countries.
- The theory attempts to explain mainly on the supply side with insufficient reference to the condition of demand.
Application of the theory was probably the theory that was formulated, since poor harvest in those days means that many people died for starvation. If may still be true of some more densely population where the standard of living is low.
- THE MARKET THEORY OR MODERN THEORY OF WAGES
The modern theory of wages is also called demand and supply theory. According to this theory wages is determined by the interaction between demand and supply.
Wages are the price of labour like other prices are determined in a market.
-To understand the theory of wage determination, we have to understand the demand for and supply of labour affecting them.
DEMAND FOR LABOUR
The demand for labour in a factor market is a derived demand. It is derived from the anticipated goods and services in the production of which it assists. However the demand for labour is also affected by;-
- Elasticity of demand for the commodity produced.
- Technique of production.
- Price of other factors of production.
- Marginal productivity i.e. entrepreneurs demand for labour because of its productivity. It is because of its productivity that entrepreneurs are ready to pay them.
SUPPLY FOR LABOUR
The supply for labour can be defined in two ways;-
- The total number of people available for employment.
- The total numbers of hours that people are willing to work.
The supply of labour depends on the following factors;-
- The size of population.
- The proportion of the willingness and ability to work i.e. labour force.
- The number of labour worked by each individual.
- Wage rate i.e. the supply of labour increases with the rise in wage rate and decreases in wage rate.
NATURE OF THE SUPPLY CURVE FOR LABOUR
The supply of labour increases with the increase in wage rate. Therefore the supply curve for labour is upward sloping curve or it is downward sloping curve (which is sometimes known as regressive in nature).
That if wages increases the supply of labour increases. However it increases up to a certain point from there after it decreases until increase in wages forming what is so called ‘BACKWARD SLOPING CURVE” or “REGRESSIVE SLOPING CURVE”.
From the graph therefore an increase in wages from OWO leads to the increase in the number of working hours from ONO. But further increase in wages from OW1 leads to the decrease in the number of working hours from Ono to ON1.
Why the supply curve for labour is backward sloping or it is regressive in nature?
- Reduction of number of labour/ workers willing and able to work. Sometimes it seems that when the wages of member of family especial men increase, it result the reduction of worker ( women’s ).
- Work leisure rate or income substitution effect. Ie when wages increase workers income also increase. Worker may like to have more leisure in order to enjoy their ability ( income).