Study Economics notes on Wage Differentials. Useful for revision, homework, and exam preparation in Zimbabwe.
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QUSTION 5: ON THE BASIS OF THE ECONOMIC THEORY, JUSTFY THE EXISTANCE OF WAGE DIFFERENTIALS IN YOUR COUNTRY [25\} The economic theory of wage differentials consists of two sub-theories which are the Marginal Revenue Product (MRP) theory and the Demand and Supply theory. MRP refers to the increase in revenue that is derived from the employment of an extra factor of production. The theory is based on perfect competitive labour market with the following assumptions; productivity can be clearly and objectively measured, workers are homogenous in terms of skills, firms and workers are price takers, there are no barriers to entry and exit and no trade unions, technology is constant, all firms seek to maximize profits, variable input coefficient, substitutability of factors, among others. As for the demand and supply theory, wages are determined by the interaction of demand and supply that is the market forces. The interaction of demand and supply gives the equilibrium wage rate. According to MRP theory which was profounded by Thunnen and later on modified by economists such as J B Clarks ,walras and Wicksteed, argued that productivity can be clearly and objectively measured. The demand for labour is affected by the labour productivity and the price of the commodity which labour is used to produce. For instance, in carpentry those who produce a large number of chairs are highly productive and are paid more as compared to those who produce small number of chairs. The theory then becomes questionable because not all occupations have measurable productivity, for example receptionists. Marginal Revenue Product theory also assumes that firms and workers are price takers. Firms or workers have no market power to influence the wage rate. Workers are employed depending on the prevailing wage rate in the