... much better the effect of wages on profitability than alternative definitions referring, for example, to the purchasing power of the workers' net earnings. The most straightforward and unambiguous case of U being actually and uniquely caused by high RW is the (neo)classical theory. This is based on the Marginal Productivity theory of distribution according to which firms employ workers -just as the other factors of production- until the point at which the last unit employed adds as much to Total Revenue as to Total Cost. Assuming profit maximisation and perfect competition workers are offered a (nominal) wage equal to their Marginal Revenue Product (MRP). Further more, (neo)classical theory assumes a diminishing Marginal Physical Product (MPP) because in the short-run the capital stock is constant so each additional unit of labour will have less capital stock to work with (Law of Diminishing Returns to the Variable Factor). This implicitly assumes that firms are ...

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