Productivity and Real Median Income Theories - Essay Example

The graph of productivity and real median income, as State of Working America reports, shows a gap between change in productivity and change in real median family income that has been increasing with time. The changes were equivalent from 1947 till the 1970s before the rate of change for real median family income began to slow down while the change in productivity continued to increase. Different economic theories offer to explain the trends.

Neoclassical theory identifies demand and supply forces as determinants of production, commodity prices, and distribution of income. Organizations operate to attain economic efficiencies. Production is guided by the law of marginal utility and continues until marginal returns equal the marginal cost of production. Beyond this point, production is inefficient and organizations stop production. The graph shows an increasing trend in production and therefore explains that marginal utility from production is still lower than unit production cost. Based on the theory, an advantage in production cost or higher demand for higher utility could explain the trend. The theory however fails to recognize the role of social utility in production and resource distribution (The State of Working America, 1; Wolf and Reinsick, 52- 55).

The labour theory of value explains that labour cost is the main driver of commodities’ cost, and therefore an indicator of productivity. The graph, based on the theory, shows that labour costs have been increasing at a higher rate than the median family income. It also demonstrates inequality in labour wages. The theory’s rationale is similar to that of neoclassical theory (The State of Working America 1; Wolf and Reinsick, 169).

Keynesian theory explains a relationship between productivity and aggregate demand. The graph, based on the theory shows an increase in demand despite a lower increase rate in income and therefore suggests an increase in the number of households towards higher demand and productivity values. The rationale of Keynesian theory is similar to that of neoclassical theory (The State of Working America 1; Wolf and Reinsick, 126).

The institutionalist methodology focuses on social utility instead of economic efficiency. Based on the approach, the graph demonstrates increasing investments into social utilities while demand-driven production could have similar changes to median income. The investments could be from the government and private entities. This is contrary to the neoclassical perspective of economic efficiency (The State of Working America, 1).