Marginal Productivity theory states that demand for labour depends upon marginal revenue product (MRP) MRP=MPP * MR.
- MPP = Marginal Physical Product (productivity of worker)
- MR = Marginal Revenue - revenue gained from selling good
For example, strawberry pickers will be paid depending upon how many strawberry's they pick. It is easy to measure productivity; the more you produce, the more you will be paid.
However, many other factors determine wages.
- Supply (inelastic supply = higher wages)
- Monoposony vs Competitive markets
- Trades unions / min wages
- Difficulty of determining MRP of workers
- Firms non profit maximising
- part time / full time
- service sector / private sector.