Theories of wages determination
There are various theories of wages which have been put forward by different economists from time to time 6iJt none of them is free from criticism. The most important theories of wages determination are:
(a) Subsistence Theory of Wages from Law of Wages: The Subsistence theory of wages states that:
"The wage in the long run tends to be equal to the minimum level of subsistence. By ,'minimum level of subsistence is meant the amount which is just sufficient to meet the bare necessities of life of the worker and his family.
it is argued that if wages exceed the subsistence level, the labour will marry earlier and will produce more children. This wil1 result in the increase in number of workers than what is required by employers. So the money wages will fall to the level of subsistence. If wages remain below the subsistence level, the labour will not be able to maintain their families. Due to starvation and malnutrition, etc. the death toll will increase. The-supply of labour will fall short of demand and the wages would go up to the subsistence level.
(b) Wage Fund Theory:
The theory of wage. fund states that:
"Wages' depend 'upon the proportion between population and capital.
In short, wage fund is that amount of floating capital which is set apart by employers for paying wages to the labour. The average wage rate is determined by dividing the wage fund by the total number of workers employed.
Formula for Wage Fund Theory:
Wage Fund
Wage Rate =
" Total Number of Workers
If it is desired that the average rate would increase, it can be achieved in two ways. Firstly, by increasing the floating capital and secondly by reducing the number of workers.
The theory states that labour receives what remains after payment of rent, interest, profit and taxes out of the national dividend.
"Wages in perfect competition tend to be equal to the marginal net product of a labour, By marginal net product of a labour is meant net addition or net subtraction made to the value of the total produce of a firm when one unit is added or withdrawn from it".
When an entrepreneur employs a unit of labour, how much he pays to him as wages depend upon the addition which he makes to the total revenue of the firm. If the addition made to the total revenue by a labour is $5000, the rate of wages will be equal to $5000.
The entrepreneur will not pay him more than the return which he contributes to the total production. The aim of the firm, as we already know, is to maximize profits. If the net product of a labour is higher than the amount paid to him. the entrepreneur will 'go on employing more units of labour. As he engages more and more units of labour, the net produce on the successive units begins to diminish. It is not because the successive units of labour are in any way inferior to the previous units but because of the operation of law of diminishing returns. When the' net product of the labour becomes equal to the rate of wages paid to him, the employer discontinues the employment of further unit of labour. The last unit which he thinks just worthwhile to engage is called the marginal unit. The net addition made to the total revenue of a firm by the marginal labour is called the marginal net product. The rate of wages paid to the labour tends to be equal to the marginal net product of the labour employed the margin.
As we have assumed that all units of labour are of the same grade, the remuneration which is paid to the marginal labour will be given to all the units of labour employed earlier. If any worker demands more than the marginal net product, of the labour, he will not be engaged by the employer.
This theory suggests that the wage rate in the market is determined by the interaction of job seekers [force of supply] and employers [the demands side] which is supposed to give a realistic wage level.
(e) Modern Theory of Wages:
The modern economist are of the opinion that just as the price of a 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 the help of usual demand and supply analysis, Let us now discuss in brief as to what we mean by demand for and supply of labour.