Essay: MRP Theory and determination of wages

Question: " Using marginal productivity theory, examine the view that 'wages are determined not by productivity alone but by the interaction of demand and supply of workers of various skills' "

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

Basically, demand for labour depends upon the productivity of workers and the price of the goods that the workers are producing.

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.

See also:

• Wage Determination in competitive Markets - the theory of wage determination MRP theory
• Labour Market Imperfections - what else determines wages. Basically this is the evaluation part of this question