Wage TheoriesWage Theories

Presented by-

Shehla Malik

09-MBA-55

Theories of WagesTheories of Wages

Wage Fund TheorySubsistence TheorySurplus Value TheoryMarginal Productivity TheoryResidual Claimant TheoryBargaining theory

Wage Fund TheoryWage Fund Theory Propounded by Adam Smith and John Stuart Mill –

1930. The wages of an employee are paid from the

fund, which presumably has been accumulated by the entrepreneur from operations of the previous years and savings.

The demand for labour and for wages is determined by the size of the fund.

Two important factors to increase the amount of wages: Fund should be large No. of workers should be reduced

• Criticisms: No emphasis on efficiency and productivity of

labour. It is Unclear from where the fund will come. It does not explain the difference in wages at

different levels.

Subsistence TheorySubsistence TheoryDavid Ricardo – Year 1817 Iron Law of Wages Based on Assumption – if workers are

paid more than their subsistence wage, their numbers would increase as they would procreate more; this would bring down the rate of wages.

Criticisms: Based on population.No consideration for the demand for

labour. No emphasis on efficiency of workers.No explanation of wage differentials.

Surplus Value Theory Surplus Value Theory Propounded by Karl Marx.Acc. to this theory – Worker is a

commodity which could be purchased at a very low cost.

This theory is not applicable to large organizations.

Criticisms: Labour was treated as a commodity or

as article. Wages are not paid in proportion to

the time spent. No emphasis was given on efficiency

and productivity of workers.

Marginal Productivity Theory Marginal Productivity Theory

Developed by Phillips Henry Wick steed(England) and John Bates Clark(USA).

It assumes – wages depend upon the demand for and the supply of labour.

Criticism: It is wrong to assume that more labour

could be used without increasing the supply of production facilities.

Employer offer wages less than the marginal productivity of labour.

Residual Claimant TheoryResidual Claimant Theory Francis A. Walker – enlarged this theory-

“Theory of Political Economy”- 19th Century Wages are nothing but the residue of total

revenues after deducting all other legitimate expenses such as rent, taxes, interest and profits.

Four Factors of production – Land, Labour, Capital and Entrepreneurship.

The theory tries to prove that if the productivity of workers increases, the production will increase and as a result there will be increase in residual claimant.

Criticisms: Wages not dependant on the profits or the capacity of an organization.

Workers efficiency and productivity were not taken into consideration.

Bargaining Theory Bargaining Theory Propounded by John DavidsonWages are determined by the bargaining

power of workers or trade unions.Basic wages, fringe benefits, job

differentials etc tend to be determined by the relative strength of the organization and the trade union.

Criticisms: If trade union is not strong enough to

bargain with the management, the workers would be paid less wages.

Length of service of workers, efficiency, performance does not taken into consideration.

THANK YOUTHANK YOU