Wage Determination

Posted on Feb 26 2019 - 3:54pm by simplinotesadmin

Theories of Wage Determination

Different writers and thinkers have suggested several theories for determination of wages. These theories are given below:

1. Subsistence theory

2. Wage fund theory

3. Surplus value theory

4. Residual claimant theory

5. Marginal productivity theory

6. Bargaining theory

7. Behavioural theory

 

1. Subsistence theory

This theory is also known as ‘Iron Law of Wages’. This theory was propounded by David Ricardo (1772-1823). This theory states that in the long run, wages would tend toward that sum which is necessary to maintain a worker and his family. It the wages rise above the subsistence level, then it would result in increase in population, which will bring down wages to the subsistence level. On the other hand, if the workers are paid below the subsistence level then their number will decrease as many of them would die due to hunger, malnutrition, etc. and many of them will not marry and as a result the wage rate would go up to the subsistence level.

2. Wage fund theory

This theory was given by Adam Smith (1723-1790). According to this theory the wages of an employee are paid from the fund, which is presumably has been accumulated by the entrepreneur form operations of the previous years. If wage fund is large, wages will be high and if the fund is small then the wages will be low, just enough for the subsistence. Thus, this theory provides a rigid demand and supply explanation of wages.

3. Surplus value theory

This theory was propounded by Karl Marx ( 1818-1883). According to this theory, labour was to be considered as an article of commerce, which could be purchased on the payment of subsistence price. The price of any product was determined by the labour time needed for producing it. The labour was not paid in proportion to the time spent on work, but mush less, and the surplus went over, to be utilized for paying other expenses.

4. Residual claimant theory

Walker proposed the Residual Claimant Theory, a version of the Wage Fund Theory. He hypothesized that the wage fund was derived not from previous year’s operations, but simply form residue of the total revenues after deducting all other legitimate expenses of business operations, such as, rent, taxes, interest, and profits. According to this theory, after all other factors of production have received compensation for their contribution to the process , the amount of capital left over will go to the remaining factor. Following this through to its logical conclusion, if the ‘other expenses’ consumed all of the revenue, labour, being the “residual claimant”, would receive no wages and presumably would not be entitled to them.

5. Marginal productivity theory

This theory was developed by Phillips Henry Wicksteed (England) and John Bates Clark (USA). According to this theory wages are based upon an entrepreneur’s estimate of the value that will probably be produced by the last or marginal worker. In other words, it assumes that wages depend upon the demand for, and supply of, labour. Consequently, 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. As long as each additional worker contributes more to the total value than the cost in wages, it pays the employer to continue hiring, where this becomes uneconomic, the employer may resort to superior technology.

6. Bargaining theory

This theory was given by John Davidson and American economist. According to this theory, the wages and hours of work were ultimately determined by the relative bargaining strength of the employers and the workers. According to this theory, there is an upper limit and a lower limit on wage rates and the actual rates between these limits are determined by the bargaining power for the employers and the workers. The upper limit marks the highest wages, the employers would be willing to pay, whereas, the lower limit indicates the minimum wages prescribed under the strength of resistance of the workers at the subsistence.

7. Behavioural theory

Many behavioural scientists, notably psychologists and sociologists, like March and Simon, Robert Dubin, Eliot Jacques have presented their views on wages and salaries on the basis of research studies and action programmes conducted by them. It has been found that wages are determined by such factors: size and prestige of the company, strength of the union, the employer’s concern to maintain the workers. Contribution by different kinds of work etc.

Wage differentials are explained by social norms, traditions, customs prevalent in the organization, psychological pressures on the management, prestige attached to certain jobs in terms of social status, need to maintain internal consistency in wages at the higher levels, the wages paid for similar jobs in other firms etc.

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