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marginal productivity theory

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Minimum wage legislation requires most firms to pay workers no less than the legislated minimum wage per hour. Using marginal productivity theory, explain how a change in the minimum wage affects the employment of unskilled labor.

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This posting resolves marginal productivity theory.

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In a competitive market factor payments are determined by the productivity of factors of production. Labor is no different. Labor payments, or wages, are determined by the productivity of labor. In a market economy the government can legislate a minimum wage, but they cannot legislate that companies have to hire! When governments change minimum wages they are not changing the productivity of labor.

When firms see minimum wages change, ...

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