Theories of wages -

1. Dr.V.Sivaramasethu
Annamalai University

2.  Wages are the monetary payment to the workers for performing work. Wages are
given to the workers on an hourly, daily or weekly basis which plays a key role in
boosting their morale, raising their living standard and motivating them to improve
productivity.
 The factors that affect the wages are demand and supply of labour, employer’s ability
to pay, trade union, cost of living, current wage rates, job requirement, and state
regulations.

3.  In 1817, Subsistence theory was given by David Ricardo. This theory
mainly sees labour as a part of the population and says that each member
of the society should be given sufficient food, clothing and shelter for
survival.
 The subsistence theory was propounded on the basis of the assumption
that workers or labours are just like a commodity which is bought and
sold in the market. As per this theory, the subsistence level determines the
wages of the workers.
 In case an increase in the wages is more than the subsistence
level then the population of labours will increase and as a result, there will
be an increase in the supply of labours. Consequently, there will be
a reduction in wages.
 On the other hand, if wages given to workers fall below the subsistence
level then there will be a decrease in the supply of labour due to a fall in
the population. Consequently, wages will increase.
 The subsistence theory is also known as ‘Iron Law of Wages’.

4.  In 1930, this theory was given by John Stuart Mill. The wage fund theory
was propounded with the assumption that the payment of workers is
done out of a pre-determined wealth fund. This fund is made from the
savings of the previous year operations of the organisation.
 The wage level or wage rate is determined by the amount of wage fund
and the total number of workers.
 if the wage fund is large, the wages paid to the workers will also be more.
Also, if the number of workers is reduced then the wage rate will increase.
 This theory is considered as rigid, it says that the bargaining power or
trade union cannot increase the wage level and even if they try to do so,
then this will discourage the accumulation of capital.
 The wage fund theory is criticized as it tells about the way to determine
the wage rate but does not describe the sources of wage fund. The
other drawback is that there is no mentioning of the method of estimating
wage fund.

5.  This theory was propounded by Karl Marx. According to his
theory, labours are just like an article which can be purchased by
paying ‘subsistence price’.
 As per this theory, the surplus between the labour
cost and product price should be given to the labour.
 Marx suggests that the displacement of labour is dysfunctional to the
system and it will eventually destroy capitalism.

6.  This theory was given by Francis A. Walker. He considered wages as a
residue which is nothing but a mere portion of total revenue left after
deducting other expenses like rent, interest, taxes and profits.
 This theory is criticized because the entrepreneur is the residual claimant.
There is no discussion about the influence of labour union on wage
determination.

7.  This theory was propounded by John Bates Clark and Philip Henry
Wicksteed. As per this theory, wages of the workers are determined on the
basis of the level of contribution made by the marginal worker.
 The marginal productivity theory assumes that there is a certain quantity of
workers that seeks employment.
 The wage rate at which the worker can secure employment is equal to the
addition to total production. This results in employing the marginal unit of
workers. There is an assumption that the production is carried
out under the condition of diminishing returns to labour.
 The shortcoming of the marginal productivity theory is that it fails to
explain the differences in wages.

8.  This theory was given by an American economist, John Davidson.
 According to the bargaining theory of wages, the workers and the
employers negotiate to determine the wages and the hours of work.
 As per this theory, the upper and lower limit of the wage rate
is fixed and the actual wage rates depend on the bargaining power of
both the employer and the worker.
 The upper limit is the rate above which the employer will abstain from
hiring a certain group of workers, whereas the lower limit is the rate below
which workers refuse to work.

9.  This theory says that the level of wage rate is determined on industry
comparison.
 It is a inter-disciplinary empirical and quantitative It is important to do
region cum approach to compensation that includes such considerations,
as the influence of collective bargaining, wage experience and so on.
 The theory suggests that one must analyse compensation from
a dynamic and a continually changing basis.

10.  This theory was given by Alfred Marshall. According to him, the demand
and supply of labour play a very important role in determining the wages of
the labours.
 According to this theory, the demand price of the worker is determined by
the marginal productivity of a single/individual worker. The supply of
labour means the number of workers searching for employment for
earning wages. The demand for labour refers to the number of workers
needed by the organisation.
 The supply of labour will rise with the rise in the number of working
hours and an increase in the wage rate. The demand for labour depends
upon the productivity of labour, technology, product demand and the cost of
capital inputs.

11.  This theory was given by M. Gitelman. As per this theory,
the compensation of the worker is determined by the rate of return on
the employee’s investment like employee’s education, training and
development programmes and experience.
 Generally, the wider the labour market is, the higher the wages

12.  This theory was propounded by John Maynard Keynes and is also
known as the Full Employment Wage Theory.
 According to the national income theory, full employment is the function
of national income of the country.
 National income is equal to the total of consumption plus private or
public investment.
 If the national income falls below a level that commands full employment,
then it is the responsibility of the federal government to either manipulate
any one or all of the three variables so as to increase national income and
return to full employment.