Introduction:

According to the Marginal Productivity Theory, wages will be equal to the value of marginal productivity of labour. The marginal productivity theory is based on the following assumptions:

• It assumes the existence of perfect competition.
• All labourers are homogeneous in character.
• The theory is based on the law of diminishing marginal returns.
• It assumes that different factors can substitute each other.

According to this theory, wage is equal to the value of marginal product. If the marginal product is more than the wages, then it will be profitable to engage more number of labourers. This is because the total revenue earned due to additional employment is more than the total cost of engaging them. But due to the operation of law of diminishing marginal return, the marginal value product will decline, if labour is engaged beyond a limit when wage are higher than the marginal value product, then it will be unprofitable to engage more labourers. Hence, their engagement will be reduced until the value of wage equals marginal value product.

Fig: Marginal productivity theory of wage

In the figure, If ON is the available supply of labour, OW is the equilibrium wage rate. Now, if the wage rate is increased to OW’ by a collective bargaining of trade unions, NN’ number of workers become unemployed. Thus, trade unions cannot enhance wages without creating unemployment. But, if the rise in wage brings about a sufficient increase in efficiency and productivity so that the marginal productivity curve shifts upward (MRP’), then unemployment will not be created.

Criticisms:

• Labourers may not be uniform in quality.
• This theory ignores supply side of the labourers.
• The individual entrepreneur may operate without the knowledge on law of diminishing marginal return