marginal productivity theory

Marginal productivity theory is the idea that a company would be willing to pay a worker only what they can contribute to the company’s value. The theory was developed in the late 1800s by several people, including John Bates Clark and Philip Henry Wicksteed.

Marginal productivity theory claims that it makes no economic sense to pay for the work of an employee if the cost exceeds the share of income that they bring in. The income made from each additional unit of work is called the value of its marginal product.

This idea is part of a larger concept called distribution theory. The overall idea of marginal productivity is that every type of work (labor input) should be paid based on its marginal product value.