1. THEORIES OF WAGES
Presented by-
Dr. Jyoti Khare
Associate Professor
Govt. Degree College
Maldevta, Raipur
Dehradun
2. TYPES OF WAGE THEORIES
1.The Subsistence Theory of Wages
2. Standard of Living Theory
3. Wage Fund Theory
4. Residual Claimant Theory
5. Marginal Productivity Theory
6. Bargaining theory of wages
7. Behavioral theory of wages
8. Modern theory of wage
3. 1.The Subsistence Theory of Wages
Developed by David Recardo.
Also known as “ iron law of wages”
Based on “Malthuusian Theory Of Population”.
According to this theory, “wages are determined by the cost of production of labour or
subsistence level. The wages so determined will remain fixed.”
(a level of income that provides only enough money for basic needs living below
(the) subsistence level.)
If paid more than subsistence level----workers increase----vice versa
.
Explanation of this theory: It actual wages are higher than the subsistence level, then population will increase
leading to an increase in labour supply and lower wages. If on the other hand, the actual wages fall below the
subsistence level, population will decrease resulting in a decline in labour supply and rise in wages. Since there is a
tendency for the wages to remain fixed at the subsistence level, it is called as Iron Law of Wages or Brazen Law of
Wages
4. Assumption of Subsistence theory of
wages
There is a limit to expansion of food production.
Population increases at an increasing rate.
5. Criticism of Subsistence theory of wages
ignores the demand side.
this theory ignores wage differences.
This theory is pessimistic ---- excludes all possibility of improvement in
the conditions of labour.
This theory is based on the Malthusian theory of population–
Increase supply. But experience shows that a rise in wages leads to
higher standard of living and not increase in population.
6. 2. STANDARD OF LIVING THEORY
An improved and refined version of subsistence theory.
This theory was propounded by David Recardo.
This theory gives importance to the efficiency and productivity of the worker.
When workers are paid a high wage rate for a considerable period of time, they become
accustomed to a high standard of living
According to this theory,
wage is determined by the standard of living of the workers. Standard of living refers
to the bare necessaries of life and also education, and recreation to which the
worker is habituated.
7. Criticism Standard Of Living Theory
Individuals do not have any fixed standard of living. Critics point out that there is no such
thing as a standard of living to which a worker is accustomed.
No doubt wages are determined by standard of living, but it is also true that standard of
living is determined by wages.
When wages depend on standard of living, the latter should not change. But workers’
standard of living remains fixed for sometimes but wages change frequently.
8. 3.Wage Fund Theory
This theory was developed by Adam Smith (1723-1790)
His theory was based on the basic assumption that workers are paid wages out of
a pre-determined fund of wealth. This fund, he called, wages fund created as a
result of savings.
According to Adam Smith, the demand for labour and rate of wages depend on
the size of the wages fund. Accordingly, if the wages fund is large, wages would
be high and vice versa.
9. 4. Residual Claimant Theory
The residual-claimant theory of wages, originated by the American economist Francis A.
Walker, (1840-1897)
held that wages were the remainder of total industrial revenue after rent, interest,
and profit .
He views that once all other three factors are rewarded what remains left is paid as wages
to workers.
10. 5. Marginal Productivity Theory
This theory was first of all propounded by Thunnen. Later on, economists like Wicksteed,
Walras, J.B Clark etc. modified the theory.
The marginal productivity theory states that labour is paid according to his contribution in
production. A producer hires the services of labour because he possesses the ability to
contribute in production. If worker contributes more to production he is paid more wages
and if he contributes less, w ages also will be low.
Wages is determined based on the production contributed by the last worker, i.e.
marginal worker. His/her production is called ‘marginal production’.
“As a result of competition between employees for labour and between workers for
employment, a wage-rate is determined that is equal to the marginal productivity of the
labour-force, the employers as a whole are willing to employ.” Prof. S.E. Thomas
11. Assumption of marginal productivity
theory of wages:
1. All labourers are equally efficient.
2. Constant technology
3. Perfect competition prevails both in factor and product markets.
4. There is full employment in the economy.
5.Law of diminishing marginal returns apply on the marginal productivity
of labour.
6. Labour is perfectly mobile.
12. Features of marginal productivity theory
of wages:
The Marginal Productivity theory is an improvement over the earlier theories in the
following ways:
(i) This theory is not as rigid as the subsistence level theory and other classical theories.
(ii) It takes into consideration the demand for labour by the employers and the supply of
labour, although in an indirect form.
(iii) It shows why there are differences in wage rate. Wages according to this theory vary
because of marginal productivity differences of different workers.
(iv) It gives importance to the productivity of labour.
13. Criticism of marginal productivity theory
of wages:
it is based on unrealistic assumptions like perfect competition, homogeneous character of
labour etc.
Lord J.M Keynes criticized the theory as it is based on static conditions.
The marginal productivity theory is one sided. It takes into consideration only the demand
side.
This theory only guides the employer to employ workers up to the level where their
marginal productivity equals price. But, it does not tell how the wages are determined.
The theory concerns itself with the long run.it does not deal with short run.
14. The Bargaining Theory of Wages:
Propounded - By John Davidson
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.
Level of wages in an industry depends on the bargaining strength of the trade union
concerned.
Result of collective bargaining by trade unions. Collective bargaining provides an
example of what is sometimes called bi-lateral monopoly.
The power of a trade union depends on the size of its membership, the size of its fighting
fund and the extent of the dislocation to the national economy it can cause by a strike. In
times of full employment, the union will be in a strong position, in a depression they will be
weaker.
15. Many behavioural scientists—notably psychologists and sociologists- like March and Simon,
Robert Dubin, Eliot Jacques—have presented their views on wages and salaries on the
basis of research studies
It has been found that wages are determined by such factors as . size and prestige of the
company, strength of the union, the employer’s concern to maintain the workers,
contribution by different kinds of workers, etc.
In other words,Wage differentials are explained by social norms, traditions, customers
prevalent in the organisation psychological pressures on the management, prestige
attached to certain jobs in terms of social status, need to maintain internal consistency in
wages at the higher levels, the wages paid for similar jobs in other firms, etc.
In nut shell, 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.
Behavioural Theories of Wages
16. The Surplus Value Theory of Wages
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.
The price of any product is determined by the labour time needed for producing it.
The labourer is not paid in proportion to the time spent on work, but much less, and the
surplus goes to be utilised for paying other expenses.
17. Modern Theory of Wages
According to the modern theory of wages, wages are the price of services rendered by a labor to
the employer.
As products the prices are determined with the help of demand and supply curve. Similarly,
The wages (prices of services rendered by labor) is also obtained with the help of demand and
supply of labor.
The demand for labour comes from the entrepreneurs as it is used for the production of goods and
services.
Thus, the demand for labour depends upon the productivity of labour i.e.,
The higher the productivity of labour, the greater will be the demand for it from employers.
Thus, demand for labour depends upon the marginal productivity of labour; since the marginal
productivity of labour will slope downwards after a stage, the demand curve of labour will also slope
downward.
Modern theory of wages regards wages as a price of labour and all other prices determined by the
usual supply and demand analysis. According to this approach, wages are determined by the
interaction of market forces of demand and supply.
18. Factors Effecting Demand And Supply Of
Labour
Factors effecting
demand of
labour
• Technological changes
• Derived demand
• Proportion of labour
• Cost of other factors
Factors effecting
supply of labour
• Size of population
• Efficiency of labour
• Mobility of labour
