Although the marginal productivity theory of income distribution is a well-established part of economic theory, closely linked to the analysis of markets in general, it is a source of some controversy. There are two main objections to it.

First, in the real world we see large disparities in income between factors of production that, in the eyes of some observers, should receive the same payment. Perhaps the most conspicuous examples in the United States are the large differences in the average wages between women and men and among various racial and ethnic groups. Do these wage differences really reflect differences in marginal productivity, or is something else going on?

Second, many people wrongly believe that the marginal productivity theory of income distribution gives a moral justification for the distribution of income, implying that the existing distribution is fair and appropriate. This misconception sometimes leads other people, who believe that the current distribution of income is unfair, to reject marginal productivity theory.

To address these controversies, we’ll start by looking at income disparities across gender and ethnic groups. Then we’ll ask what factors might account for these disparities and whether these explanations are consistent with the marginal productivity theory of income distribution.