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Top 7 Theories of Wages in detail with its assumptions and criticisms

In this article we will discuss about Top 7 Theories of Wages in detail with its assumptions and criticisms.The most important theories of wages are:

1. Subsistence Theory

2. Wage Fund Theory

3. Surplus Value Theory

4.Residual claimed Theory

5.Marginal productivity Theory

6.Bargaining Theory

7. Behavioural Theory.


 1. Subsistence Theory :This theory was propounded by David Recardo in 1817. According to this theory, wages should be given in such a way that person will able to sustain, able to get good clothes and shelter and amount paid is just equal to sufficient for subsistence.According to them, the amount of wages are determined by the cost of production of labour or subsistence level and determined wage will remain same. Iron law of Wages define that if the actual wage is higher than the subsistence level then labour supply increases at lower wages and vice-versa. So that the tendency of wages remain fixed at subsistence level.

         Assumption:

  • If workers are paid more then subsistence level then workers increases and wage rate decline.
  • If workers are paid less then subsistence level then workers decreases and wage rate become high.
  • Minimum wage rate is to be fixed.

        Criticisms:

  1. This theory explain wages from supply side and it ignores demand side.
  2. It ignores wage differentiation, minimum wage rate is fixed and all workers get equal wages
  3. This theory is pessimistic because it excludes all possibility of improvement in the conditions of labour through increase in workers efficiency.

 

 2. Wage Fund Theory:This theory was developed by Adam smith ( Father of Economics) 1772-90.According to them, workers get wages out of predetermined fund with the procedure. The employers set amount to pay wages to employees. According to them, increase in wage rate is possible when there is increase in wage fund or reduction in the number of labour and vice-versa.

Wage rate = Wage Fund / No. Of Workers.

    Assumptions:

  • Wages are paid out of funds to the workers.
  • Fund which is paid to the workers are created by savings.
  • Demand for labour and rates of wages depends on the size of the fund saved foe wages.
  • If the saved fund for wages is large then wage are high and vice-versa.

       Criticisms:

  1. This theory states wage rate by dividing the wage fund with no. Of workers but it doesn’t tell about source of wage and estimation method.
  2. It doesn’t talk about service sector.
  3. Weakness of this theory is that it neglects the quality and efficiency of the workers in determining the wage rate.
  4. Failed to explain the differences in wage rate.

3. Surplus Value Theory: This theory was developed by Karl Marx (1849-83). It is radical theory which gives complete approach for management of people. According to this theory labour is an article which we can bought by paying them. The payment made to bought that employees or labour is known as wages. The surplus left after the payment to the employees or labour goes to the owner.

Assumptions:

  • Labour or Employees are article so they can be bought and we can purchase them.
  •  It can be purchased on payment that is known as wages.
  • After payment of that wages , the surplus income left with owner and that income is of owner.

Criticisms:

  1. Labour is a factor of production.
  2. We took same cost for all and purchased on payment.
  3. Employees have no value in extra value.

4. Residual claimant Theory:This theory is developed by Francis A. Walker (1840-97). According to Walker, there are four factors of production or business activity which consist of Land, Labour, Capital,and Entrepreneurs. He said that we pay to these subsequent factors like Rent to land, Wages to Labour, Interest to Capital and Entrepreneurs get Profit. The remaining amount will be distributed among the employees or labour in the form of wages. Thus according to this theory workers are residual theory.

Wage rate = Total output – ( Rent + Interest + Profit)

Assumptions:

  • There are four factor of production that are land, labour, capital and entrepreneurs.
  • Production is a combination of payment to all factors. We are paying Rent to land, Wages to Labour, Interest to Capital and Entrepreneurs get Profit.
  • After payment to all factors remaining amount gives to the employees as wages.

Criticisms:

  1. Might be possible the partner get all the profits, nothing left for employees.
  2. Might be nothing left after paying to all the factors.
  3. It takes demand foe employees in consideration but Supply side of employees ignored
  4. It is not the worker residual claimant but the entrepreneurs.
  5. Role of trade union is ignored in determining the wages.

 

5. Marginal Productivity Theory:This theory is developed by Phillips Henry Wick-steed and John Bates Clark. According to this theory, the wages are determined on the basis of contribution by the last worker on production. The change in production unit by that person tend to “marginal production”. It means There are 10 workers and they produce 100 units. When there are 11 workers and produced unit are 110 ,it means  110- 100= 10 means by adding new worker the production unit increases to 10 unit and it paid to new worker. The wage of the labour should be equal to the value of marginal production. The employment of an additional unit of labour will result in increase in output and cost. As long as MPP is greater than MFC, the employer will employ additional units of labour. But he will stop employing additional units of labour when MPP=MC.

Assumptions:

  • Wages are determined on the basis of contribution by last worker on production according to new worker. In order to find out Marginal factor cost quantity of other factors remain constant.
  • Labour is homogeneous

Criticisms:

  1. Only takes demand side in consideration but ignores supply side.
  2. This theory is unjust because wages are determined by the marginal productivity
  3. This theory assumes perfect competition in the product market. But the market for goods is characterizedby imperfect competition.
  4. Fails to explain differences in wages.

 

6. Bargaining Theory:This theory is developed by John Davidson. According to this theory, The fixation of the wages of workers depends upon the bargaining power of the workers. If the bargaining power of workers or employee are stronger then wages tends to high and vice-versa. It means if the employer plays stronger role then employee, the bargaining power of the employee tend to low and wages are also low and vice-versa.

Assumptions:

  • Fixation of wages depends on worker bargaining power.
  • High union bargaining power tend to high wages.
  • Low union bargaining power tend to lower wages.

Criticisms:

  1. This theory don’t distinguish between fair and unfair bargains.
  2. Consideration for justifiable reasons could be absent.
  3. This approach fails to account for non-material like psychological factors that may influence the bargaining process.

7. Behavioural Theory: This theory is developed by Marsh Aliot, Simon and Dubion. This theory basically based on the research studies and action conducted. This theory is based upon the elements like acceptance of wage level by the employee, prevalent internal wage structure, employee consideration on money and wages and salary motivators. There are non fixed rules variations for fixation of employee wages. Wages are design by taking into considering these elements. In organization the behaviour of employer , workers and employee don’t not remain constant it changes according to time, that’s why this is known as Behavioural Theory. Behaviour theory depends upon the behaviour of employer, employee and workers.

Assumptions:

  • It is based on research studies and action conducted.
  • There is no fix variation rule for fixation of employees wages.
  • Wages depends upon what workers wants.
  • Wages depend upon the acceptance of employer.
  • Demand and supply of workers in market determines the wages.

So we will discuss Top 7 Theories of Wage in detail with its assumptions and criticisms. For any query comment below.

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