Theories of Wages

Theories of Wages

1. Subsistence Theory of Wages

Subsistence theory is one of the oldest theories of wages. It was first explained by Physiocrats, a group of French economists and restated by Ricardo.

According to this theory, wage must be equal to the subsistence level of the labourer and his family. Subsistence means the minimum amount of food, clothing and shelter which workers and their family require for existence.

If workers are paid higher wages than the subsistence level, the workers would be better off and they will have large families. Hence, the population would increase. When the population increases, the supply of labourer would increase and therefore, wages will come down.

On the other hand, if wages are lower than the subsistence level, there would be a reduction in population and thereby the supply of labour falls and wages increase to the subsistence level. So this theory is closely associated with Malthusian Theory of Population. This theory holds that the wages of workers would not be above or below the subsistence level of the labourer and his family.

Criticisms

·           Role of trade unions in collective bargainings was not found.

·           It does not explain the differences in wages in different occupations.

·           The assumption that population would increase with a rise in wage rate is not correct. Poor families (and countries) have more Children than rich families (countries). Wage rate alone does not-determine birth-rate Actually, as increases, people can afford to downsize their family size for adopting costly family planning procedures; while poor people cannot do so.

2. Standard of Living Theory of Wages

The Standard of Living Theory of Wages developed by Torrance is an improved and refined version of the Subsistence Theory of Wage. According to this theory, wage is equal to the standard of living of the workers. If standard of living is high, wages will be high and vice versa.

Standard of living wage means the amount necessary to maintain the labourer in the standard of life to which he is accustomed.

Criticism

According to this theory, the standard of living determines wages. But in actual practice, wages determine the standard of living.

3. Wage Fund Theory of Wages

This theory was first propounded by Adam Smith. But the credit goes to J.S.Mill who perfected this theory

According to Mill “every employer will keep a given amount of capital for payment to the workers”. It is a known as “Wage Fund”. It is fixed and constant. Wages depend directly upon the fund and inversely with number of labourers employed. The average wage of a worker can be calculated by using the formula.

Average wage per wo ker = Total Wage Fund / Number of Workers

If the number of workers increases, the wage per worker would fall and vice versa.

Criticisms

1.        It does not explain the difference in wages in different occupations.

2.        It ignores the role of trade unions.

3.        Actually the capitalists will take away a large sum before making payment of wages.

4. Residual Claimant Theory of Wage

This theory was propounded by the American economist F.A.Walkar in 1875, in his book Political Economy. According to this theory, wage is the residual portion after paying the remuneration of all the other three factors, namely, land, capital and organization.

Criticisms

1.        This theory does not explain the role of trade unions can secure higher wage for workers.

2.        Demand side of labour in the determination of wages needs to be considered.

5. Marginal Productivity Theory of Wage

The application of general theory of distribution to wage fixation is the marginal productivity theory of wages.

According to the theory wages are determined by the marginal productivity of labour and equal to it at the point of equilibrium.

Under perfect competition wage is paid equal to marginal product of labour (wage = MPL) But in real world where there is imperfect competition, there is exploitation of labour and wage is less than MPL.