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Hamill Manufacturing of Pennsylvania makes of the marginal product of the last machinist
precision components for military helicopters hired, and due to diminishing returns to labor,
and nuclear submarines. Their highly skilled that value will be lower than the average over all
senior machinists are well paid compared to machinists currently employed. Second, a
other workers in manufacturing, earning nearly worker’s equilibrium wage rate includes other
$70,000 in 2006, excluding benefits. Like most costs, such as employee benefits, that have to be
skilled machinists in the United States, Hamill’s added to the $70,000 salary. The marginal pro-
machinists are very productive: according to the ductivity theory of income distribution says that Source: Courtesy U.S. Air Force
National Mechanists Association, in 2006 each workers are paid a wage rate, including all bene-
skilled American machinist generated approxi- fits, equal to the value of the marginal product. At
mately $120,000 in yearly revenue. Hamill, the machinists have job security and good
But there is a $50,000 difference between the benefits, which add to their salary. Including
salary paid to Hamill machinists and the revenue these benefits, machinists’ total compensation raise its wages in order to attract more skilled
they generate. Does this mean that the marginal will be equal to the value of the marginal product machinists? The problem is that the work they
productivity theory of income distribution doesn’t of the last machinist employed. do is so specialized that it is hard to hire from
hold? Doesn’t the theory imply that machinists In Hamill’s case, there is yet another factor the outside, even when the company raises
should be paid $120,000, the average revenue that explains the $50,000 gap: there are not wages as an inducement. To address this prob-
that each one generates? The answer is no, for enough machinists at the current wage rate. Al- lem, Hamill is now spending a significant
two reasons. First, the $120,000 figure is aver- though the company increased the number of amount of money training each new hire. In the
aged over all machinists currently employed. The employees from 85 in 2004 to 110 in 2006, end, it does appear that the marginal productiv-
theory says that machinists will be paid the value they would like to hire more. Why doesn’t Hamill ity theory of income distribution holds.

marginal productivity theory can explain the distribution of income among different
types of land, labor, and capital as well as the distribution of income among the factors
of production. In Module 73 we look more closely at the distribution of income be-
tween different types of labor and the extent to which the marginal productivity theory
of income distribution explains differences in workers’ wages.

Module 70 AP Review
Solutions appear at the back of the book.

Check Your Understanding
1. Explain how each of the following events would affect the 2. Explain the following statement: “When firms in different
equilibrium rental rate and the equilibrium quantity in the industries all compete for the same land, the value of the
land market. marginal product of the last unit of land rented will be equal
a. Developers improve the process of filling in coastal waters across all firms, regardless of whether they are in different
with rocks and soil to form large new areas of land. industries.”
b. New fertilizers improve the productivity of each acre of
farmland.

module 70 The Markets for Land and Capital 693