Capital and Natural Resource Markets

Read the 6 sections of this chapter on resource markets, including topics such as demand, supply, and price ceilings and floors.

4. Marginal Productivity and Income Distribution

Demand for the type of workers that can provide positive marginal productivity over marginal cost will see an increase in their wages.

Learning Objectives

Explain how the marginal productivity of different factors can affect income distribution

Key Takeaways

Key Points
  • Firms hire workers when they have higher marginal productivity than marginal cost.
  • Workers are often categorized as either skilled or unskilled workers. Firms only hire the type of workers they need.
  • If, on aggregate, there is a higher demand for skilled workers than unskilled workers, skilled workers will gain proportionally more income as their wages rise.

Key Terms
  • marginal productivity: The extra output that can be produced by using one more unit of the input

Firms will hire workers if the marginal productivity of the worker is greater than the marginal cost. That is, firms will hire someone if the employee can produce more value for the firm than s/he costs in wages or salary.

Not all labor, however, is equal in the firm's eyes. The two broad categorizations of laborers is skilled (e.g. doctor) and unskilled (e.g. an assembly line worker). Firms will hire the type of workers that they need.

Scientists are Skilled Workers: Scientists are skilled workers. Firms, such as pharmaceutical companies, will hire more scientists if the marginal productivity is greater than the marginal cost. This will drive up demand for scientists, and therefore their wages.

Suppose there are many firms with positive net marginal productivity of skilled labor. They will each seek to hire more skilled workers, driving up demand for skilled workers. This will increase the wages of skilled workers, but not of unskilled workers. Skilled workers will be gain proportionally more wealth than unskilled workers. Taken in aggregate, the marginal productivity of one type of worker influences the income that they earn in comparison to other types of workers.

On a national scale, this can have massive implications. If a country has a number of workers with high marginal productivity proportional to marginal cost, firms will want to hire those workers. Those workers will see gains to their income, affecting overall income distribution.

It is important to remember, however, that countries will specialize in goods in which they have a comparative advantage. If a country has an absolutely advantage in both skilled and unskilled workers, but a comparative advantage in unskilled workers, the country will specialize in the good that is intensive in the use of unskilled labor. The increased returns will go to unskilled workers (they will see their wages increase), even though the country also has an absolute advantage in skilled labor.