1
$\begingroup$

I am referring to the HL Ahuja Microeconomics book and here is what I have understood -

  1. Clarks Version : Wage = Marginal Product of Labour ( w = MP(L) )
  2. Marshall Hicks Version: Wage = Value of Marginal Product of Labour (w = P.MP(L))

The author (and a lot of other sources on the net) both the above mean the same thing and the two versions of the marginal productivity theory differ only in their treatment of the supply curve for labour.

Question - how are the two versions same when wage equals to two different things ? It's apparently a simple point that I am having trouble grasping. Looking forward to any helpful clarifications. Thanks.

$\endgroup$
2
  • 1
    $\begingroup$ I don't have the book but my first guess would be that the first gives the wage is in real terms (normalizing price of output to 1) while the second gives the wage in nominal terms. $\endgroup$ – tdm Jun 10 at 9:40
  • $\begingroup$ Yes, this seems to make the most sense. Thank you for replying! $\endgroup$ – Adz Jun 10 at 11:20
2
$\begingroup$

There are multiple differences between the Clark's marginal product theory and Marshall-Hicks marginal product theory, since they both have a little bit different assumptions on labor supply (see discussion in Dorfman 1987, Hicks 1932, Vaggi and Groenewegen 2003), but I do not think this is what the book is referring to at all (although I do not have access to the textbook you cite).

Rather, here the difference is that in Hicksian quasi-Walrsian or non-Walrasian models nominal rigidity is often important so the same equation is just rendered expressed in nominal terms.

Note in Hicksian models $w$ is not real wage but a nominal wage. Consequently, in terms of real wage we will have:

$$\frac{w}{P} = F_L'$$

where $P$ is the price level and $F_L'$ marginal product of labor given some production function $F(L,...)$. The Clark's model seems to be just expressed all in real terms where:

$$ \omega = F'_L $$

with $\omega = \frac{w}{P}$, here I am using different symbols to differentiate between real and nominal wages, but I think the textbook you use does not do that explicitly.

$\endgroup$
2
  • $\begingroup$ Yup, this seems to make most sense. Thanks a lot! $\endgroup$ – Adz Jun 10 at 11:19
  • 2
    $\begingroup$ @Adz, if you think the answer makes sense, then you should accept it. $\endgroup$ – VARulle Jun 10 at 22:02

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.