Economic theories of wages

1. Economic
Theories of
Wages
Athira G
Roll No.H1610
MHRM

2. The Economic theories of
wages are:
1.Subsistence Theory
2.Wages fund Theory
3.The residual claimant Theory
4.The surplus value Theory
5.Marginal productivity Theory
6.The bargaining Theory of wages
7.Employment Theory
8.Competitive Theory

3. 1.Subsistence Theory
 By David Ricardo
 Labourers are paid to enable them to
subsist and perpetuate the race
without increase or diminution.
Assumptions:
 If the workers were paid more than
subsistence wage, the number would
increase.

4. 2.Wages fund Theory
 Adam Smith
 Wages are paid out of a
predetermined fund of wealth.
 If fund is large, wages should be high
and if it is small wages would be
reduced.
 Demand for labour and wages paid
are determined by the size of the fund.
 Francis A walker attacked the theory.

5. 3.The residual claimant Theory
 Francis a Walker
 4 factors of production,
land,labour,capital and
entrepreneurship.
 Labour is the residual claimant.
 This theory does not explain how
trade unions are able to increase the
wages.
 It does not consider role of labour i
productivity.

6. 4.The surplus value Theory
 Marxian theory - Karl Marx
 Labour is an article of commerce,
which could be purchased on payment
of ‘subsistence price’.
 Price of any product is determined by
the labour time needed for producing
it.
 The labour is not paid in proportion to
the time spent on work, but much less,
and the surplus went over, to be
utilized for paying other expenses.

7. 5.Marginal productivity Theory
 Philips Henry and Bates Clark
 Wages are based upon an entrepreneurs
estimate of the value that will probably
be produced by the last or marginal
worker.
 It assumes that wages depend upon the
demand for, and supply of, labour.
 Workers are paid what they are
economically worth.
 The result is that the employer has a
larger share in profit as has not to pay to
the non-marginal workers.

8. 6.The bargaining Theory of
wages
 John Davidson
 Wages are determined by the relative
bargaining power of workers or trade
unions and of employers.
 when a trade union is involved, basic
wages, fringe benefits, job differentials
and individual differences tend to be
determined by the relative strength of
the organisation and the trade union.

9. 7.Employment Theory
 Supply and demand theory
 It is based on the inter-relation between
wages and employment.
 Unemployment would disappear, if
workers were to accept a voluntary cut in
wages, pleaded for wage flexibility for
promoting employment at a time of
organisation depression.
 The lowering in prices would cause
additional demand, which will increase
production, and will increase
employment of workers.

10. 8.Competitive Theory
 Wages were fixed in accordance with
demand and supply, workers would be
attracted by high wages to industries,
occupations and localities.