WEW-070

Microeconomics Question from Walter E. Williams:

"The wage rate is determined by the marginal productivity of labor." If someone offers this statement as a formulation of the marginal productivity theory of wages, what corrections or amendments will you insist upon? Explain.

Answer

I would insist on the correction that wages are based on the marginal productivity of labor and on the particular field or talent the person works in or possesses. A good example is the difference in salary between a baseball star and a good teacher. Being able to hit a baseball 400 feet consistently will earn you millions annually, while being the best fourth-grade teacher in the nation will earn you little. The baseball star earns more, not because he works harder or has more talent (marginal productivity of labor), but because he works in an area that people are willing to pay a lot for.

Another amendment I'd think is important is that wage = MPL (the equilibrium condition) for perfect competition in the factor market.

By way of parenthetical -- MPL is a source of demand (holding other capital constant) and the wage is reflecting the supply of labor. In atomistic competition we assume that a single firm can buy as much labor at the prevailing price as they would desire. In less atomistic models the wage rate would vary depending on the number of workers desired.

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