Economic Theory of Wages

Subsistence Theory
David Recardo Year 1817 Deals with Population Lowering the wages rather than Labour Each member of the society be provided enough food, clothing, and shelter to continue to exist.

More than Subsistence Level

Procreation

Wage Fund Theory

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.

Residual Claimant Theory

Francis A. Walker enlarged this theoryTheory 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.

The Marxian Theory of Surplus Value

This theory is inversion of Residual Claimant Theory Labour is the sole source of economic value and therefore labour should exercise the prime claim on revenue. Surplus between labour cost and product cost should be paid to the labour.

Marginal Productivity Theory ( Philips and Bates Clerk)

Accd to this wages are based upon entrepreneurs estimate of the value that will probably be produced by the last or marginal worker. 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.

The Bargaining Theory of Wages (John Davidson)

Accd to this theory wages are determined by the relative bargaining power of workers or trade unions and of employers.

Employment Theory (Supply and Demand Theory)

It is based on interrelation between wages and employment. Accd to it, unemployment would disappear if workers were to accept a voluntary cut in wages, pleaded for wage flexibility for promoting employment at a time of organization depression. These wage cuts would bring down costs and thereby fall in price. This lowering in prices would cause additional demand ,which will increase production. This will increase employment of workers.

Competitive Theory
The basic assumption of competitive theories of pay is that employers compete among themselves by offering a higher wage to attract employees; while employees compete with one another for jobs by offering their services for a lower wage. Competition then, is essentially a disequilibrium process by which excess demand and excess supply cause changes in wages.

Limitations of Economic Theories

Economic Theories assume that prices are either fully fixed or fully flexible Most wage theories are based on the assumption of full employment. In most developing countries this is not really the case. Labour is not as mobile as capital and products are. Therefore , wage rates could be influenced by the changes in the demand for and supply of factors other than labour too.

 In several industries labour costs are less critical than other costs. Also fluctuations in interest rate and exchange rates as well as relative intensity of capital and technology ,influence the demand for and may cause substitution of both the input and the output of labour as well as the proportionate costs of labour in the total cost of production.

 Wages and benefits reflect industry characteristics and personal characteristics as well as societal preferences. Interference by government and trade unions could minimize the influence of the market forces organization demand and supply of labour.

 Technology and productivity are major determinants. Low wages may not mean low wage costs. Similarly high wage rates may not mean high unit labour costs. With the growing pressure for linking labour standards with international trade, increasingly it will become difficult for countries, companies and industries to compete on the basis of comparative advantage of cheap labour.