Marginal Productivity Theory of Distribution and Wage and its criticism.
Wages
are the reward paid to the worker for his contribution in the process of
production. Any type of reward for human exertion whether paid by hour, day,
month or year and paid in cash, kind or both is called wages.
To
A.H. Hansen, “Wages is the payment to labour for its assistance to production.”
According
to Karl Marx, “Labour is like any commodity that is bought and sold in the
market. The worker sells his labour in the labour market. The price received
for his service is wage.”
To
MC Connell, “Wage rate is the price paid for the use of labour.”
Nominal
Wage is the wage expressed in terms of money.
Real wage is measured in terms of goods and
services it will purchase. When prices in the economy rise, the same wage will
buy less goods and services .So when price increases, even if money wage remains same, the real wage will
fall.
So
real wage WR = W/P.
The
term real wage also means the money wage plus the non-monetary benefits
received in some jobs.
The
factors determining Real Wages
1. Purchasing
power of money – P ↑ PP ↓ : P↓ PP↑
2. Additional
Facilities - Free quarters / cheap rations/ free uniform / etc.
3. Nature
of job - Risky job
4. Chances
of extra income - Doctor, Teacher
5. Condition
of Work – Clean / Healthy Environment
6. Regularity
of Employment
7. Future
Prospects
8. Social
Status
9. Cost of
training
10. Timely Payment
Marginal Productivity Theory of Distribution and Wage
The
essence of the marginal productivity theory is that price of a factor of
production depends upon its Marginal Productivity.
The
origin of the concept of Marginal Productivity can be traced to Ricardo and West.
Both of them applied the Marginal Productivity theory only to land and wage .It
was rediscovered by economists like J. B. Clark, Jevons, Wickstead, Walrus and
later Marshall and Hicks popularized the doctrine.
In order to bring out the fundamental factors at work in the mechanics of income distribution, Clark assumed completely static society, free from the disturbances causes by economic growth or change. He assumed a constant population, a constant capital and unchanging techniques of production. He also assumed perfect competition in factor market and perfect mobility of labour and capital. He further assumed that form of capital can be varied at will. In other words, physical instruments of production can be adapted to varying quantities and abilities of available labour. Further he treats labour as a homogeneous factor by taking identical labour units.
Every
rational entrepreneur /employer will try to utilize his fixed amount of capital
so as to maximise his profits. For this, he will hire as many labourers as can
be profitably put to work with a given amount of capital. For any individual
firm or industry, marginal productivity of labour will decline as more and more
workers are added to the fixed quantity of capital. He will go on hiring more
and more labour units as long as the addition made to the total product by an
extra labour is greater than the wage rate he has to pay it. The employer will
reach equilibrium when the wage rate is just equal to the marginal productivity
of labour.
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If the wage is W1 which is above the above the equilibrium wage, L1 labourers will be employed leaving L1L labourers unemployed. In their bid to get job, they will lower the wage to W.
On the other hand, if the wage is W2, which is less than the equilibrium wage, the labour demand will be L2, while the available labour supply is L. Then demand by employers for labour will increase the wage to W.
Thus, given the quantity of labour in the country, wage rate is determined by the marginal productivity of labour.
Critical Evaluation of Marginal Productivity Theory of Distribution And Wage
Marginal
Productivity theory has been a pillar of the traditional theory of distribution.
But there are some criticisms against this theory.
1) It is
argued that marginal productivity theory takes too many assumptions which are
quite unrealistic. Therefore, the theory has no validity. The theory assumes a
stationary state, perfect competition, perfect mobility of factors, equal
bargaining power of buyers and sellers and perfect knowledge which are far away
from reality.
2) The
marginal productivity theory is based on the assumption of perfect competition
and will not be valid in imperfect market. In imperfect market there emerged
two concepts of marginal productivity, viz: marginal revenue product and value
of marginal product. In the imperfect market factors are paid according to MRP
which is less than VMP. So the factor is exploited according to Joan Robinson
.So in case of imperfect market, the marginal productivity theory needs to be
modified.
3) The
theory cannot explain the rewards when the factors are used in fixed
proportions. Marginal Productivity Theory assumes a good degree of elasticity
of substitution exists between the factors of production so that increase in
one factor, keeping other factors constant, leads to the increase in the
addition to the total product, i.e. it has a positive MP and therefore gets a
positive reward.
But when the factors are used in fixed proportions,
increase in one factor keeping others constant will not lead to any increase in
total production at all. So marginal productivity becomes zero which is not
possible.
4) In its
original version, trade unions and collective bargaining cannot raise wages of
labour without creating unemployment. But in reality, trade unions and collective
bargaining increase wage without creating unemployment.
5) Marginal
Productivity Theory ignores the favourable effect of higher wages on
productivity of labour. But in reality with rise in wages efficiency and
productivity of labour improves. So higher wages are sometimes economical,
there is economy of higher wages.
6) All the
employers may not wish to equate wage and marginal productivity. According to
J. Pen, “It is necessary for every entrepreneur to be able to find the exact
point of equilibrium, some will overshoot the equality of wage and marginal productivity
and others will remain below it. However, the trend is towards equality. In
this sense the theory gives only a rough approximation of equality, but as such
it is probably not bad.
7) A
controversial problem concerning the marginal productivity theory is that if
the various factors are remunerated in accordance with their marginal
productivity, whether the total product would be exhausted. This difficulty is
called the adding up problem or product exhaustion problem. If the production
function is linear homogeneous i.e. constant returns to scale prevails, then
according to Euler’s theorem the total product would be exhausted. But in reality,
constant returns to scale may not prevail all the time. The marginal
productivity theory gives only a rough approximation of reality.
8) The
marginal productivity theory does explain the remuneration of the entrepreneur i.e.
profit. Marginal productivity of a factor can be known if it can be varied by
keeping other factor fixed. But the entrepreneur in a firm is only one and
fixed. If entrepreneur is withdrawn, production will stop. So difficult to
estimate marginal contribution of entrepreneur. So in neo classical theory profit is shown as
a residual income.
9) Finally, the marginal productivity theory does not give any importance to power structure, social status; social conventions etc. It does not explain discrimination between men and women, between races and between social classes. It does not explain why top executives earn more and why unions can push up wages.
Though
there are many criticisms, the marginal productivity theory is important in governing
the prices of factors. So, the marginal productivity theory still occupies an
important place in the theory of distribution.
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