Sound wage theories address questions such as adequacy of wages, fairness and equity, hard working conditions and efforts, compensation against inflation, and additional employee commitment as he grows up in the growing family.
10 theories of wages are;
The main theories of wages are discussed below:
Subsistence Theory
David Ricardo developed this theory. It is also known as the iron law of wages. It says that workers are paid to subsist and perpetuate the race without increasing or diminution.
Low wages lead to decreased labor due to death and malnutrition, while higher wages increase their number due to better health, long life, and marriage.
This theory has been criticized on the following grounds:
- The relation between marriages and wages. It is incorrect to say that when the money income of a person increases about the subsistence level, he marries and increases the birth rate. When income increases, people improve their standard of living instead of having a marriage.
- Demand-side ignored. This theory emphasizes the supply side and ignores labor demand to determine wages.
- The difference in wages. This theory fails to explain why wages differ from occupation to occupation and from person to person.
- Trade unions were ignored. This theory ignores the role of trade unions. But in the present age, unions play a significant role in determining wages.
Wage Fund Theory
Adam Smith developed this theory. The focus is on the employer and his capacity to pay. The wage level is a function of surplus funds available to the employer: the higher the fund, the higher the wage.
This theory has been criticized on the following grounds:
- The difference in wages. According to this theory, all the workers receive equal wages, while wages differ from worker to worker.
- The demand factor was ignored. In this theory, labor supply has given much importance, while the demand factor has been ignored.
- Existence of funds. According to this theory, there is a separate fund for the payment of wages, while in reality, there is no special fund that is particularly meant to pay wages to the workers.
- Objection on homogeneous labor. This theory assumes that labor is homogeneous and they should be paid equally, but all the units of labor cannot be homogeneous.
Surplus Value Theory
Karl Marx developed it. Here labor is viewed as a commodity for trade.
Labor adds value to the product. The employer did not pay the full amount so collected from the customer, and instead, only a part is paid to them as wage, retaining the remaining by the employer.
In Marx’s estimation, it was not the pressure of the population that drove wages to the subsistence level but rather the existence of many unemployed workers.
Marx blamed unemployment on capitalists. He renewed Ricardo’s belief that the exchange value of any product was determined by the hours of labor necessary to create it.
Furthermore, Marx held that, in capitalism, labor was merely a commodity: a laborer would receive a subsistence wage in exchange for work.
Marx speculated, however, that the owner of capital could force the worker to spend more time on the job than was necessary for earning this subsistence income, and the excess product-or surplus value-thus created would be claimed by the owner.
This argument was eventually disproved, and the labor theory of value and the subsistence theory of wages were also found invalid.
Residual Claimant Theory
Francis walker propounded this theory.
According to this theory, four factors add value to the manufactured product. These are land, labor, capital, and entrepreneurship. The revenue earned by selling products was first distributed among the three factors as compensation for their contribution.
Whatever remained was paid to labor as wage against their value addition. Thus labor is considered a residual claimant. This theory has been criticized on the following grounds:
- Supply influence is ignored. This theory ignores the supply side’s influence in determining wages.
- Role of trade unions. It fails to explain how the trade unions raise their wages.
- Entrepreneur right. A residual claimant is the right of the entrepreneur and not the labor. The labor receives its share during the process of production.
- Case of loss. Suppose the firms suffer a loss; how will labor bear the loss in that case?
Marginal Productivity Theory
Phillips Henry Wicksteed and John Bates developed this theory. Here demand and supply of labor in the labor market determine wages.
Accordingly, workers are paid what they are economically worth as assessed by the employer.
The marginal concept says that the employer continues to employ labor as long as the value added by the marginal worker is more than his cost. The result is that the employer has a larger share in the profit as it has not paid the non-marginal workers.
Demand and Supply Theory
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 demand and supply forces.
The labor supply depends upon factors such as the population’s size, labor mobility, and social structure. The wages will be determined when demand and supply are equal.
Bargaining Theory
John Davidson developed this theory.
Here wage level is determined by the bargaining power of employers and their association vs. employees and their trade unions.
Behavioral Theory
Norms, traditions, customs, goodwill, and social pressure influence the wage structure. Wages are the best motivators for workers.
The wage must satisfy many needs identified by Maslow, Herzberg, and others. Examples of needs are physiological, security, food and shelter, etc.
Just Price Theory
This theory, developed by Plato and Aristotle, suggested that each person born into the world be foreordinated to occupy the same status and enjoy the same creative comforts as his/her parents.
Therefore, society should provide these individuals with sufficient compensation to maintain the same position of life they were born in.
This theory did not recognize the differences in productive efficiency between two workers.
Investment Theory
H.M. Gitelman developed this theory. The individual workers’ investment consists of education, training, and experience that a worker has invested in a lifetime of work.
Gitelman assumes that workers’ compensation is fixed by the rate of return on that worker’s investment. Workers can control the level of their compensation.
For example, MBA graduates from Harvard University are likely to be paid more than those of less costly universities in the USA.
