In economics, the price paid to labour for its contribution to the process of production
is called wages.
Labour is an important factor of production. If there is no labour to work, all other
factors, be it land or capital, will remain idle.
Thus, Karl Marx termed labour as the “creator of all value”.
However, labour alone cannot produce as most of the production is the result of joint
efforts of different factors of production. Therefore, the share of the produce paid to
labour for its production activity is called wage.
“A wage may be defined as the sum of money paid under contract by an employer to
worker for services rendered.” –Benham
“Wages is the payment to labour for its assistance to production.” -A.H. Hansen
“Wage rate is the price paid for the use of labour.” -Mc Connel
“A wage is price, it is the price paid by the employer to the worker on account of
labour performed.” -J.R. Turne
Concepts of Wages
The following are the two main concepts of wages:
A. Money Wages or Nominal Wages &
B. Real Wages
A. Money Wages or Nominal Wages:
The total amount of money received by the labourer in the process of production is
called the money wages or nominal wages.
B. Real Wages
Real wages mean translation of money wages into real terms or in terms of commodities
and services that money can buy. They refer to the advantages of worker’s occupation,
i.e. the amount of the necessaries, comforts and luxuries of life which the worker can
command in return for his services.
An example will make the things clear. Suppose ‘A’ receives Rs. 500 p.m. as money
wages during the year. Suppose also that midway through the year the prices of
commodities and services, that the worker buys, go up, on the average, by 50%.
It means that though the money wages remain the same, the real wages (consumption
basket in terms of commodities and services) are reduced by 50%. Real wages also include
extra supplementary benefits along with the money wages.
A wage is monetary compensation (or remuneration, personnel expenses, labour) paid by
an employer to an employee in exchange for work done. Payment may be calculated as a fixed
amount for each task completed (a task wage or piece rate), or at an hourly or daily rate (wage
labour), or based on an easily measured quantity of work done.
Wages are part of the expenses that are involved in running a business.
Payment by wage contrasts with salaried work, in which the employer pays an arranged amount at
steady intervals (such as a week or month) regardless of hours worked, with commission which
conditions pay on individual performance, and with compensation based on the performance of the
company as a whole. Waged employees may also receive tips or gratuity paid directly by clients
and employee benefits which are non-monetary forms of compensation. Since wage labour is the
predominant form of work, the term "wage" sometimes refers to all forms (or all monetary forms) of
Origins and necessary
Wage labour involves the exchange of money for time spent at work (the latter quantity is
termed labour power by Marx and subsequent economists). As Moses I. Finley lays out the issue
in The Ancient Economy:
The very idea of wage-labour requires two difficult conceptual steps.
First it requires the abstraction of a man's labour from both his person and the product of his
work. When one purchases an object from an independent craftsman ... one has not bought his
labour but the object, which he had produced in his own time and under his own conditions of
work. But when one hires labour, one purchases an abstraction, labour-power, which the purchaser
then uses at a time and under conditions which he, the purchaser, not the "owner" of the labour-
power, determines (and for which he normally pays after he has consumed it).
● Second, the wage labour system requires the establishment of a method of measuring the
labour one has purchased, for purposes of payment, commonly by introducing a second
abstraction, namely labour-time.
● The earliest such unit of time, still frequently used, is the day of work. The invention
of clocks coincided with the elaborating of subdivisions of time for work, of which
the hour became the most common, underlying the concept of an hourly wage.
● Subsistence theory
● Wage fund theory
● Marginal productivity theory
● Residual Claimant Theory
● Bargaining theory of wages
● Surplus value theory
This theory was propounded by David Recardo (1772-1823). According to this theory, “The
labourers are paid to enable them to subsist and perpetuate the race without increase or
diminution”. This payment is also called as ‘subsistence wages’. The basic assumption of
this theory is that if workers are paid wages more than subsistence level, workers’ number
will increase and, as a result wages will come down to the subsistence level.
On the contrary, if workers are paid less than subsistence wages, the number of workers will
decrease as a result of starvation death; malnutrition, disease etc. and many would not
marry. Then, wage rates would again go up to subsistence level. Since wage rate tends to be
at, subsistence level at all cases, that is why this theory is also known as ‘Iron Law of
Wages’. The subsistence wages refers to minimum wages.
Wage fund theory
Marginal productivity theory
residual claimant theory
Bargaining theory of wages
Wage fund theory
The wage–fund doctrine is an expression that comes from early economic theory that
seeks to show that the amount of money a worker earns in wages, paid to them from a
fixed amount of funds available to employers each year (capital), is determined by the
relationship of wages and capital to any changes in population.
In the words of J. R. McCulloch,
“wages depend at any particular moment on the magnitude of the Fund or Capital
appropriated to the payment of wages compared with the number of laborers...
Laborers are everywhere the divisor, capital the dividend.”
The economists who first stated this relationship assumed that the amount of capital available in a
given year to pay wages was an unchanging amount. So they thought that as the population changed
so too would the wages of workers. If the population increased, but the amount of money available to
pay as wages stayed the same, the results might be all workers would make less, or if one worker
made more, another would have to make less to make up for it and workers would struggle to earn
enough money to provide for basic living requirements
The wage-fund theory held that wages depended on the relative amounts of capital available for the
payment of workers and the size of the labour force. Wages increase only with an increase in capital
or a decrease in the number of workers. Although the size of the wage fund could change over time,
at any given moment it was fixed. Thus, legislation to raise wages would be unsuccessful, since there
was only a fixed fund to draw on.
Marginal Productivity theory
Marginal productivity theory, in economics, a theory developed at the end of the 19th
century by John Bates Clark and Philip Henry Wicksteed, who argued that a business
firm would be willing to pay a productive agent only what he adds to the firm’s well-being or
utility; that it is clearly unprofitable to buy, for example, a man-hour of labour if it adds less
to its buyer’s income than what it costs. This marginal yield of a productive input came to be
called the value of its marginal product, and the resulting theory of distribution states that
every type of input will be paid the value of its marginal product.
Supporters of this theory maintain that the test of an economic theory should be its
predictive power. They hold that the marginal-productivity theory is a guide to long-run
trends in wage determination and applies more generally than the bargaining theory of wages.
Residual Claimant Theory
Residual claimant theory was given by Walker, an American economist. According to his theory,
wages are the residual part of the capital left after paying to the other factors of production.
Walker advocated that rent and interest factors of production are based on the contract among
individuals, while profit is obtained by adopting certain principles. However, the level of wages is
not determined by any such principles.
According to residual claimant theory, wages are paid from the residual amount of total output
left after paying for the three factors of production, namely rent, interest, and profit. As per this
theory, the level of wages would increase with an increase in the productivity of labor.
There are certain criticisms against the residual claimant theory. The theory fails to explain the
role of trade unions in increasing the wages of an employee. Moreover, Walker did not explain
the impact of supply of labor on wages.
Bargaining theory of wages
This theory was developed to a considerable extent by John Davidson, (1898) that the
determination of wages is an extremely complicated process involving numerous influences
that interact to establish the relative bargaining strength of the parties.
According to this theory, the fixation of wages depends on the bargaining power of
workers/trade unions and of employers. If workers are stronger in bargaining process, then
wages tends to be high. In case, employer plays a stronger role, then wages tends to be low.
Surplus Wage Theory
Behavioural Wage theory
SURPLUS VALUE THEORY OF
This theory was developed by Karl Marx (1849-1883). This theory is based on the
basic assumption that like other article, labour is also an article which could be
purchased on payment of its price i.e. wages. This payment, according to Karl Marx, is
at subsistence level which is less than in proportion to time labour takes to produce
items. The surplus, according to him, goes to the owner. Karl Marx is well known for
his advocation in the favour of labour.
BEHAVIOURAL THEORIES OF
Based on research studies and action programs conducted, some behavioral scientists
have also developed theories of wages. Their theories are based on elements like
employee’s acceptance to a wage level, the prevalent internal wage structure,
employee’s consideration on money or’ wages and salaries as motivators.
There is a wide gulf in pay and earnings rates between jobs.
A wage differential refers to the difference in wages between people with similar skills within
differing localities or industries. It can also refer to the difference in wages between employees
who have dissimilar skills within the same industry.
It is generally referenced when discussing the given risk of a certain job. For example, if a
certain line of work requires someone to work around hazardous chemicals, then that job may
be due a higher wage when compared to other jobs in that industry that do not necessitate
coming into contact with dangerous chemicals. There are also geographical wage differentials
where people with the same job may be paid different amounts based on where exactly they
live and the attractiveness of the area.
Importance of wage
Wage differential is a term used in labour economics to analyze the relation between the wage
rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A
compensating differential, which is also called a compensating wage differential or an equalizing
difference, is defined as the additional amount of income that a given worker must be offered in
order to motivate them to accept a given undesirable job, relative to other jobs that worker could
One can also speak of the compensating differential for an especially desirable job, or one that
provides special benefits, but in this case the differential would be negative: that is, a given worker
would be willing to accept a lower wage for an especially desirable job, relative to other jobs.
The idea of compensating differentials has been used to analyze issues such as the risk of future
unemployment, the risk of injury, the risk of unsafe intercourse, the monetary value workers place
on their own lives and in explaining geographical wage differentials.
Occupations in an organization widely differ from one another in terms of skill
requirement and the extent of requirement and the extent of responsibility. Accordingly,
wages vary from occupation to occupation. Such differences in occupations induce
people/workers to undertake more challenging jobs, encourage workers to develop their
skills by way of education and training. It is varying skill requirement for different
occupation that shapes the manpower planning in an organization - be it an industrial
organization or educational institution.
Inter firm differential
There are wage differentials of workers in different plants in the same area and
occupation. Factors like differences in quality of labour employed by different firms,
imperfections in the labour market and differences in the efficiency of equipment’s and
supervision result in inter-firm wage differentials. Added to these are differences in
technological advance, managerial efficiency, financial capability, firm’s age and size,
availability of raw material, power and transport facilities also account for differences in
wages among firms.
Inter – area or regional
Inter – industry differentials
Personal wage differentials
Inter area or regional
Not only wages differ among occupations, but these also differ in case of workers working in
the same occupation at different geographical regions. These differences are the result of
working conditions prevalent in different regions of the country. For example, the Central
Government employees serving in the remote and disturbed areas like the North Eastern
States of India are paid additional remuneration in the form of the Remote Area Allowance.
Sometimes, such wage differentials are used to attract people to serve in particular regions.
“The industry mix varies from one area to another, and for this reason alone, the
general average of wages would be expected to vary.”
Inter industry differential
These differentials arise when workers in the same occupation and the same area but in
different industries are paid different wages. Inter-industry differentials reflect skill
differentials. The industries paying higher wages have mostly been industries
with a large number of skilled workers, While those paying less have been
industries with a large proportion of unskilled and semi-skilled workers.
Others factors influencing inter-industry differentials are the
extent of unionization, the structure of product markets, the ability to pay,
labour-capital ratio, and the stage of development of an industry.
Personal wage differential
These arise because of the differences in the personal characteristics (age or sex) of
workers working in the same unit and occupation. Though provision of equal pay for
equal work is certainly there, but it is still not the reality.
Instances are there when woman worker is paid less than her male counterpar
t for doing the same job. Of course, there are other reasons also which cause wage
differentials between male and female workers.