Question

Explain the notion of the marginal product of labor and how it affects wages.

Answer 1

The theory of marginal income productivity of wages is a theory in neoclassical economics that states that wages are paid at a level equal to the marginal income product of labor, MRP (the price of the marginal product of labor), which is the increase in income induced by the increase in output generated by the last employed worker. This is justified in a model by assuming that the company is profit-maximizing and would therefore employ labor only to the extent that marginal labor costs are equal to the company's marginal income.

Companies will hire more workers if the labor's marginal income benefit exceeds the wage rate and stop hiring as soon as the two prices are equal.
The point where the MRPL is equal to the prevailing rate of pay is the equilibrium of the labor market.
The marginal decision rule states that as long as the marginal benefit of such a change exceeds the marginal cost, a firm can shift spending between output factors.
If the marginal benefit of extra labor, MPL / PL, exceeds the marginal cost, MPK / PK, then by investing more on labor and less on assets, the business will be better off.
Under the law of marginal judgment, labor market equilibrium will occur where MPL / PL= MPK / PK is concerned.

The labor market is somewhat different from the goods and services market because demand for labor is a driven demand; labor is not needed for its own sake, but rather because it helps to increase production. Through a benefit maximization prism, businesses evaluate their labor demand, eventually trying to achieve the optimal output level and the lowest possible price.

An increase in demand or a decline in supply will raise wages; they will be reduced by increased supply and decreased demand.
The curve of demand depends on the marginal product of labor and the value generated by good labor. If the demand curve moves to the left, whether due to increased production or export value, wages will be pushed up.
In the long run, labor supply is simply a function of the size of the population, but in the short run it depends on factors such as worker desires, skills and training a job requires, and wages available in alternative employment.