Wage Theories.pptx

Theories of wages -

1. Wage Theories Dr.V.Sivaramasethu Annamalai University

2. introduction 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. Subsistence Theory 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. Wage Fund Theory 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.   Surplus Value Theory 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. Residual Claimant Theory 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. Marginal Productivity Theory 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. Bargaining Theory 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. Institutional wage theory 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. Supply and demand theory 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.   Investment theory 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. National income theory 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.