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Wage Theories

This document outlines and describes 7 major theories of how wages are determined: 1) Wages Fund Theory, which argues wages are paid from a predetermined fund based on savings, 2) Subsistence Theory, where wages are paid at a level for workers to subsist, 3) Surplus Value Theory, where wages are paid at a subsistence level and profits go to owners, 4) Residual Claimant Theory, where wages are what is left after rewarding other factors of production, 5) Marginal Productivity Theory, where wages are determined by a worker's marginal productivity, 6) Bargaining Theory, where wages depend on bargaining power between workers and employers, and 7) Behavioral Theories, which consider employee motivations

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George Michael Lim
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865 views

Wage Theories

This document outlines and describes 7 major theories of how wages are determined: 1) Wages Fund Theory, which argues wages are paid from a predetermined fund based on savings, 2) Subsistence Theory, where wages are paid at a level for workers to subsist, 3) Surplus Value Theory, where wages are paid at a subsistence level and profits go to owners, 4) Residual Claimant Theory, where wages are what is left after rewarding other factors of production, 5) Marginal Productivity Theory, where wages are determined by a worker's marginal productivity, 6) Bargaining Theory, where wages depend on bargaining power between workers and employers, and 7) Behavioral Theories, which consider employee motivations

Uploaded by

George Michael Lim
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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WAGE THEORIES

Some of the most important theories of wages are as follows: 1. Wages


Fund Theory 2. Subsistence Theory 3. The Surplus Value Theory of
Wages 4. Residual Claimant Theory 5. Marginal Productivity Theory 6.
The Bargaining Theory of Wages 7. Behavioural Theories of Wages.

How much and on which basis wages should be paid to the workers for
services rendered by them has been a subject matter of great concern
and debate among economic thinkers for a long time This has given
birth to several wage theories, i.e. how wages are determined. Out of
them, some important theories of wages are discussed here.

1. Wages 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.

2. Subsistence Theory:
This theory was propounded by David Recardo (1772-1823). According
to this theory, “The labourers are paid to enable them to subsist and
perpetuate the race without increase or diminution”. This payment is
also called as ‘subsistence wages’. The basic assumption of this theory
is that if workers are paid wages more than subsistence level, workers’
number will increase and, as a result wages will come down to the
subsistence level.

On the contrary, if workers are paid less than subsistence wages, the
number of workers will decrease as a result of starvation death;
malnutrition, disease etc. and many would not marry. Then, wage
rates would again go up to subsistence level. Since wage rate tends to
be at, subsistence level at all cases, that is why this theory is also
known as ‘Iron Law of Wages’. The subsistence wages refers to
minimum wages.

3. The Surplus Value Theory of Wages:


This theory was 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.

4. Residual Claimant Theory:


This theory owes its development to Francis A. Walker (1840-1897).
According to Walker, there are four factors of production or business
activity, viz., land, labour, capital, and entrepreneurship. He views
that once all other three factors are rewarded what remains left is paid
as wages to workers. Thus, according to this theory, worker is the
residual claimant.

5. Marginal Productivity Theory:


This theory was propounded by Phillips Henry Wick-steed (England)
and John Bates Clark of U.S.A. According to this theory, wages is
determined based on the production contributed by the last worker,
i.e. marginal worker. His/her production is called ‘marginal
production’.

6. The Bargaining Theory of Wages:


John Davidson was the profounder of this theory. 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.

7. Behavioural Theories of Wages:


Based on research studies and action programmes conducted, some
behavioural scientists have also developed theories of wages. 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.

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