Monday, 9 May 2011

Various Theories for the determination of wages

Following are the important theories of wages :

According to this theory, the wage in the long run tends to be equal to the level of subsistance. By minimum level of subsistance means the amount which is just sufficient to meet the basic necessities of life of the workers and their family. It is argud that if wages exceed the subsistence level the labour will marry and will produce children. The supply of labour will increase then the demand and money wages will fall to the level of subsistance. If wages remain below the subsistance level, the labour will not be able to maintain their families. The death rate will increase due to hunger and supply of labour will fall than its demand.Again wages will rise to the subsistance level.

Criticism :- This theory has been criticized on the following grounds :

1. Relation between marriages and wages :- It is incorrect to say that when the money income of a person increases about the subsistence level, he marriages and increases the birth rate. While infect when income increases, people improve their standard of living instead of having the marriage.

2. Demand side ignored :- This theory gives more importance to the supply side and ignores the demand side labour, for the determination of wages.

3. Difference in wages :- This theory falls to explain that why wages differ from occupation to occupation and from person to person.

4. Trade unions ignored :- This theory ignores the role of trade unions. But in the present age these are playing very important role in the determination of wages.

This theory is associated with Adam Smith and J.S.Mill. Wage fund is that amount of floating capital which is set a part by employer for paying wages to the labour. The average wage rate is determined by dividing the wages fund by the total number of workers employed

Wage rate = Wage Fund / Total no. of workers.

For example if capital of fund is 10,000 and number of workers are 100 then rate of wages will be 10,000/100 = 100

If we want to increase the rate of wages, there are two methods. We should increase the fund or we should decrease the supply of labour. We can not increase the fund quickly, because the savings increase slowly. Further if any group of labour succeeds in getting higher wages, the result will be that other workers would get less.

Criticism :- This theory has been criticized on the following grounds :

1. Difference in wages :- According to this theory, all the workers receive the equal wages while infect wages differ from worker to worker.

2. Demand factor ignored :- In this theory supply of labour has given much importance while the demand factor has been ignored.

3. Existence of fund :- According to this theory there is a separate fund for the payment of wages, while in reality there is no special fund which is particularly meant for the payment of wages to the workers.

4. Objection on homogeneous labour :- This theory assumes that labour is homogeneous and they should be paid equally but all the units of labour can not be homogeneous.

According to this theory labour receives what remains after the payment of rent, profits, taxes and interest out of the national income. This theory is offered by American economist Mr. Walker. He says, "Wages equal the whole product minus rent interest and profit."

Jevon says, "The wages of working man are ultimately coincident with what he produces, after the deduction of rent, taxes and the interest on capital."

Criticism :- This theory has been criticized on the following grounds :

1. Supply influence ignored :- This theory ignores the influence or supply side in the determination of wages.

2. Role trade unions :- It fails to explain as to how the trade unions raise their wages.

3. Entrepreneur right :- Residual claimant is the right of entrepreneur and not the labour. The labour receives its share during the process of production.

4. Case of loss :- If the firms suffers a loss, in that case how labour will bear the loss.

"Marginal productivity means the net addition or net subtraction caused in the total production by employing or withdrawing one unit of production."

A producer always compares the marginal product value with the price of a marginal input unit. This theory states that price of each factor of production tends to be equal to its marginal productivity.


1. Homogeneous units :- It has been assumed that all the input units are exactly same. While it is not possible that all units should be same.

2. Perfect competition :- It is assumed in this theory that the law of diminishing return also applies to the business organization.

Just as the price of commodity is determined by the interaction of the forces of demand and supply, the rate of wages can also be determined in the same way with help of demand and supply forces.

SUPPLY OF LABOUR :- Supply of labour depends upon the following factors.

1. Size of population :- If the size of population is greater then the supply of labour will also be greater.

2. Mobility of labour :- The supply of labour also depends upon the mobility of labour. Because if any occupation or country supply of labour decreases it can be increased.

3. Social structure :- Supply of labour also depends upon the social set up of a country. If any society allows the women to work, then the supply of labour will be greater.

The wages will be determined at the point where demand and supply both are equal to each other.
We can explain it by following diagram :

Explanation :- According to the above diagram demand curve (DD) and supply curve (SS) both cut each other at the point "T". So it is an equilibrium point. The OF wages will be determined in the market.

Criticism :- In this theory it is assumed that there is perfect competition in the market while perfect competition is absent in the market of labour and goods.


Anonymous,  23 March 2014 at 10:36  

A very good explanation of theories but the figure in this article is not correct because the supply curve of labour is backward bending.

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