Limitations of the marginal productivity theory of wages

Limitations of the marginal productivity theory of wages

  • All units of labour are not homogenous and workers productivity varies. A of labour differs from another in terms of skills, education attainment physical ability. Therefore, efficiency of labour differs from worker to worker, is therefore wrong to assume that all units of labour are homogeneous.

  • Labour tends to be immobile yet the theory assumes perfectly mobility, theory assumes perfect mobility of labour between different employments places. However, labour tends to be immobile both occupationally geographically.
  • Perfect competition does not exist in true market situation. There imperfection in labour markets due to government interference in fixing wages
  • All units of labour are not fully employed as there are cases of unemployment and under employment. There is no full employment situation of labour in developing countries due to excess supply of unskilled labour resulting in some form of unemployment and underemployment.
  • Government usually intervenes in fixing wages yet the theory assumes no government intervention. Government influences wages through fixing minimum and maximum wages as well as adopting policies such as wage freeze and wage restraint.

  • It ignores the role of trade unions in bargaining for high wages. For example the Uganda Medical Workers’ Union normally influences wages of their members through round table negotiations with the employers. This trade union pressure influences wage rate and not marginal productivity of labour, thus making the theory not applicable to developing countries.
  • It does not consider the exploitation of workers by the capitalists, for example, underpayment of the workers. Wage rate is usually not equal to the value of the marginal product of labour
  • because capitalists desire to remain with surplus fits and therefore, pay workers less than the value of their marginal product. This thus makes the theory not applicable to developing countries.
  • The law of diminishing returns may not apply all the time. The theory is based n the law of diminishing returns but sometimes there is constant and increasing return because of inventions and innovations leading to technological development. This leads to an increase not decrease in output as more labourers are employed.
  • It does not consider the level of education and training which may differ and thus influence the level of wages paid to labour. Highly educated labour earns more than less educated workers even if their marginal product is the same or even less.

  • It is difficult to measure the marginal product of labour in some occupations or sectors for example the service industry like education and health sectors. Therefore, wages of workers in the service sector are determined using other factors thus making the theory irrelevant.
  • It ignores historical factors in wage determination for example the inherited salary structure in developing countries. The colonial government had a wage structure for different categories of the civil service by which some categories of servants earned more wages than others. To-date government pays workers according to wage rates inherited from the colonial times and not according to marginal productivity theory of distribution as applied to wages.
  • Labour cannot be completely substituted in the production process as the theory assumes.
  • It ignores the supply of labour in determining wages for example the supply of unskilled labour.
  •  Labour and the employers cannot determine the exact value of the marginal product since output is produced by many factors. It is therefore, not possible to calculate the marginal productivity of labour separate from the contribution of other co-operant factors thus making determination of wages on the basis of marginal productivity of labour difficult.
  • Employer at times use the subsistence level as a measure of wages, which may be below or above the value of the marginal product. Workers are therefore, paid according to what the employers consider adequate for maintaining subsistence needs or cost of living but not according to marginal productivity of labour.

  • Bargaining for wages by individual labourers is not taken into account by the theory. Sometimes wages are determined by workers ability to bargain and workers who have stronger bargaining power earn more than those who are poor at bargaining for higher wages.


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