Marginal Productivity Theory– Wage TheoriesCompensation Management

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Marginal Productivity Theory

• According to this theory,

wages are based upon an

entrepreneur’s estimate

of the value that will

probably be produced by

the last or marginal

workers.

Marginal Productivity Theory

• In other words, it

assumes that wages

depend upon the

demand for, and supply

of, labour.

Marginal Productivity Theory

• Consequently, workers are

paid what they are

economically worth. The

result is that the employers

has larger share in profit as

has not to pay to the non-

marginal workers.

Marginal Productivity Theory• This theory is criticized on

the following grounds: – (a) It is wrong to assume

that more labour could be used without increasing the supply of production facilities.

– (b) This theory is based on perfect competition in the market which is seldom found in practice.

Marginal Productivity Theory• This theory is criticized on

the following grounds: – (c) In practice, the

employers offer wages less than the marginal productivity of labour. In many cases, the labour unions are able to bargain for wages higher than the marginal productivity of labour.