Early theories of wages

Early theories of wages

The subsistence theory of wages : According to this theory, the wages that are paid to a worker must be just enough to cover his bare needs of subsistence. If the workers are paid less than the subsistence wage, there will be starvation and death and it will result in shortage of supply of labour.

Criticism : The main criticism against the theory is that it is based on the assumption that an increase in wages will result in an increase in population. Man is different from an animal. Besides bare needs, he needs some comforts. This theory does not take note of that. And it is one sided. It ignores the forces operating on the side of demand. This theory is based on bad ethics.

The standard of living theory : This theory tells that wages depend upon the standard of living of workers.

Criticism : There is no doubt that the standard of living theory is an improvement on the subsistence theory. It is true that there is relationship between standard of living and wages. But it is rather difficult to say which is the cause and which is the result.

The Wages Fund Theory : According to Wages Fund Theory, 'wages depend upon the proportion between population and capital'. The term 'capital' in the context refers to the fund set apart for payment of wages. And the word 'population' refers to workers. If the supply of workers increases, wages will fall and vice versa.

Criticism : The theory assumes that an increase in wages will result in an increase in population. But there is no direct relationship between the two. Further, it tells that if wages rise, profits will fall. This is not correct because during periods of good trade, both wages and profits will rise.

The Residual Claimant Theory : According to this theory, wages 'equal the whole product minus rent, interest and profits' (Walker). In other words, the theory tells that wages are paid out of the residue that is left over after making payment for rent, interest and profits.

Criticism : The main criticism against the theory is that it considers wages as residual payment. But wages are in the nature of advance payment and they have to be paid first. Normally, profits are taken at the end.