Reply To: Wages


A wage is the market price for a unit of a particular labor service. All market prices are determined by demand for and supply of the item. It is a law of economics a greater demand for an item, ceteris paribus, results in a higher market-clearing price. The demanders of labor services are entrepreneurs. The factors that determine the demand entrepreneurs have for a particular labor service are its contribution to the production of output (marginal physical product), the price of output it helps to produce (which combined with MPP gives marginal revenue product), and the rate of interest (which combined with MRP gives DMRP). Entrepreneurs are willing to pay more for a labor service of greater productivity because it generates more output and therefore, more revenue for the entreprise. Because labor is relatively non-specific, the competitive bidding of other entrepreneurs prevents any one of them from paying less than its DMRP.

An elite NFL quarterback commands a higher wage than an average NFL quarterback because he helps produce more wins, more division titles, more championships all of which generate more revenue for the team owners. A team’s entrepreneurs cannot pay less than his quarterback’s DMRP as long as there is a market economy in which bidding for his services can occur.