AP Economics Mr. Bernstein Module 73: Theories of Income Distribution December 22, 2014

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 2

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 4

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 5