AP Economics
Mr. Bernstein
Module 73:
Theories of Income Distribution
December 2015
AP Economics
Mr. Bernstein
Marginal Productivity Theory of Income
Distribution
• Marginal Productivity at equilibrium determines
division of income among factors of production
• Can also explain why some workers are paid more
than others
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AP Economics
Mr. Bernstein
Marginal Productivity and Wage Inequality
• Compensating Differentials
• ie Graveyard shift
• Differences in Talent
• ie All-Star Pro Athlete
• Human Capital
• ie Master’s Degree
3
AP Economics
Mr. Bernstein
Marginal Productivity and Wage Inequality
Conditions where employees with similar skills may
receive differing wages:
• Market Power
• Unions
• Efficiency Wages
• Incentives for performance increases productivity
• Reduces cost of employee turnover
• Discrimination
• Supply and Demand should eliminate discrimination
• Could be explained by reduced access to training, etc.
• Perceptions of skills distorted by bias
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AP Economics
Mr. Bernstein
Does MP Theory Really Work?
• Does research conclude income differences are
due to differences in productivity?
• If not…,
MP Theory is rejected
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