AP Economics

Mr. Bernstein

Module 73: Theories of Income Distribution

December 22, 2014

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AP EconomicsMr. 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 EconomicsMr. 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

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AP EconomicsMr. Bernstein

Marginal Productivity and Wage InequalityConditions 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 EconomicsMr. Bernstein

Does MP Theory Really Work?• Does research conclude income differences are

due to differences in productivity?• If not…, MP Theory is rejected