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Module 38 krugman 1
Module 38
Marginal Productivity Theory
What’s New in the Fourth Edition?
• Updated business cases
Module Objectives
• What is the marginal productivity theory of income distribution?
• What are the sources of wage disparities, and what is the role of discrimination?
The Marginal Productivity Theory of Income Distribution
Creating Student Interest
• Ask students how businesses choose the wages or salaries paid to employees. You may get answers
like, “they check with their competitors,” or “they consult trade groups.” Ask them what happens if
the employee doesn’t do very much for the employer, even though they are being paid what everyone
else who does that job is paid. They might point out that the employee should be fired. Remind
students that employees should be paid what they are worth to the employer, or the value of marginal
product. But, some employees aren’t “worth” the same in terms of value of marginal product.
Presenting the Material
Is the Marginal Productivity Theory of Income Distribution Really True?
Creating Student Interest
• Ask students what the following statistics tell us:
1. Women on average earn 72 cents for each dollar a man earns.
2. Hispanic men with a college degree earn on average about 90% more than Hispanic men
who do not have a high school diploma.
Get students thinking about the differences between their answers to (1) and (2).
Presenting the Material
• Use Handout 38-1 to discuss discrimination.
Module Outline
I. The marginal productivity theory of income distribution
A. In perfect competition, the equilibrium wage in the market is equal to the value of the marginal
product of labor.
Module 38 krugman 2
B. The equilibrium value of the marginal product of a factor is the additional value produced by
the last unit of that factor employed in the factor market as a whole.
C. The markets for land and capital
1. The rental rate of either land or capital is the cost, implicit or explicit, of using a unit of
that asset for a given period.
2. According to the marginal productivity theory of income distribution, every factor of
production is paid its equilibrium value of the marginal product.
II. Is the Marginal Productivity Theory of Income Distribution Really True?
A. There are two main objections to the marginal productivity theory of income distribution.
1. In the real world, we see large disparities of income that may not be due to productivity
differences.
B. Wage disparities in practice
1. There are wage disparities across gender and ethnicity: White males have the highest
2. A large part of the observed inequality in wages can be explained by considerations that
are consistent with the marginal productivity theory of income distribution.
3. Marginal productivity theory does not explain all the inequality in wages. There are
three major additional explanations.
a. Market power
(1) Factor markets are not perfectly competitive.
b. Efficiency wages
(1) Employers pay wages above VMPL to increase worker effort and decrease
turnover.
c. Discrimination: Although market forces tend to work against discrimination,
employers may have the ability to discriminate without hurting their profits when
labor markets don’t work well.
Case Studies in the Text
Economics in Action
Walmart Discovers Efficiency Wages—This EIA shows how Walmart improved customer service through
increased wages.
Ask students the following questions:
Module 38 krugman 3
1. Why were Walmart stores not meeting customer service goals? (Management concluded
2. What changes did Walmart implement and how did that affect their revenue? (Walmart
Web Resources
For information about the relationship between the level of education and wages, search “education level
Module 38 krugman 4
Handout 38-1
Date_________ Name____________________________ Class________ Professor________________
Discrimination?
Figure 19-8 in the book indicates that women earn $0.77 for every $1 earned by a man. Which of the
explanations below are about differences in VMPL between men and women? How could you explain
the wage disparity with these explanations?
• Compensating wage differentials
• Choice of college major and choice of career
• Time constraints
• The differing negotiating skills of men and women
• Number of years of experience
• Number of years in continuous employment
• Number of hours of work
• Employer discrimination
• Customer discrimination
Module 38 krugman 5
Answers
• Compensating wage differentials
• Choice of college major and choice of career
• Time constraints
• The differing negotiating skills of men and women
• Number of years of experience
• Number of years in continuous employment
• Number of hours of work
• Employer discrimination
• Customer discrimination
