Goldwasser AP Microeconomics Module 36 Theories of Income Distribution

Name _______________

Before You Read the Module: Summary This module presents the marginal productivity theory of income distribution and discusses the extent to which it explains wage disparities between workers. Module Objectives Review these objectives before you read the module. Place a y on the line when you understand each of the following: ___ Objective 1. The marginal productivity theory of income distribution in the labor market ___ Objective 2. Sources of wage disparities and the role of discrimination While You Read the Module Define these key terms as you read the module. Compensating differentials

Unions

Efficiency-wage model

List questions or difficulties from your initial reading of the module.

While You Read the MODULE Fill-in-the-Blanks Fill in the table completing the following statements. Terms may be used more than once. If you find yourself having difficulties) please refer to the reading.

(1) (4) (7)

(2) (5) (8)

(3) (6) (9)

According to the marginal productivity theory of income distribution, the division of income among the economy's factors of production is determined by each factor's (1) ______ at the economy's (2) ______. There are three well-understood sources of wage differences across occupations and individuals that are consistent with the marginal productivity theory of income distribution. Across different types of jobs, wages are often higher or lower depending on how attractive or unattractive the job is. These wage differences are known as (3) ______ Wages can also be different due to differences in individual ability or (4) ______ . A third reason for wage differences is an individual's education and training, known as (5) ______. But some observers believe that wage differences may not be fully explained by differences in marginal productivity. They argue that wage differences may be due to (6) ______ , that arises when markets are not competitive, (7) ______ , wages used to motivate workers to work hard, or (8) ______ against workers based on race, gender, or other characteristics.

Module Review Positive versus Normative When you study topics like income distribution, be sure to keep in mind two terms from early in this book: positive and normative. Remember positive economics describes the way the economy actually works. For example, it looks .at the extent to which the marginal productivity theory of income distribution explains the actual income distribution we see in the United States, or how efficiently factor markets work. Normative economics, on the other hand, makes prescriptive statements about how the economy should work. For example, it considers what the income distribution in the United States ought to be, or how equitable this distribution is. Positive economics tries to determine facts and to establish what income distribution exists. Normative economics draws on perceptions of equity and fairness to address what income distribution should exist. While no less important, addressing questions of equity is more complicated than determining actual income distributions. Therefore, economics more often focuses on questions of efficiency rather than equity. The marginal productivity theory of income distribution says that within a perfectly competitive market, each factor is paid the value of the output generated by the last unit of that factor employed in the factor market as a whole. This is equivalent to saying that each factor is paid the value of its marginal product. This theory implies that the division of income among the economy's factors is not arbitrary, but is instead determined by each factor's marginal productivity at the economy's equilibrium. In the real world, there are wide disparities in income among people, and some people believe that some of this income disparity is not due solely to differences in marginal productivity. Earnings differences arising from differences in human capital may not be fair or just. Individuals who receive a poor education because of their socioeconomic status or their race may have labor markets that are well described by marginal productivity theory but whose resultant distribution of income is viewed by many people as unfair. Some people believe that wage differences cannot be fully explained by compensating differentials, differences in talent, and differences in human capital. They argue that wage differences may also reflect market power, efficiency wages, and discrimination.