Karl Marxs Theory Marx's theory of wages is merely an extension of his general theory of value to a specific category of prices.

In the Marxian sense, a wage is a price paid for labor power, not for labor. "By labor power or capacity for labor is to be understood the aggregate of those mental and physical capabilities existing in a human being, which he exercises whenever he produces a use value of any description." "Labor power" is the thing that enters the labor market, being sold by the laborer and purchased by the capitalist employer. Thus, "labor power" is a commodity having exchange value, since the laborer can alienate it from his person as he sells to the capitalist the right to use his use value or labor. It is only this right that can be alienated, and consequently "labor is the substance, and the immanent measure of value, but has itself no value" (that is, no exchange value). In other words, Marx holds that the thing the worker sells to the employer is the right to put him as a worker to work. It is not the productivity of the worker that is sold; it is merely the right to make the worker exert himself. However, since the use value of the productivity of the worker cannot be severed from his power to release this use value or productivity, the employer buys the labor power but gets the use value of that labor power, or the labor itself. Thus, while it may appear that the use value of the worker, or the labor itself, is the subject of the wage contract and is paid for, the fact is that only the labor power is paid for, while the actual use of that labor power is a thing separate and distinct from it. In any event, it is the labor power that is paid for, and the value of this labor power is the wage. At this point this distinction is noted only as a part of the Marxian theory of wages. Its significance will be evident in the discussion of surplus value in the next chapter. To Marx a wage can exist only in a situation in which (1) the worker is free to sell his labor power and (2) he cannot by himself make use of it in producing some commodity for sale.

St. Thomas Aquinas Theory Most wage theories reflect overemphasis on one or another of the elements determining wages. The first noteworthy wage theory, the just-wage doctrine of the Italian philosopher St. Thomas Aquinas, emphasized moral considerations and the role of custom. A just wage is defined as that which enables the recipient to live in a manner suited to the persons social position. Aquinass theory is a view of what wages should be rather than an explanation of what they actually are.

Subsistence Theory The first modern explanation of wages, the so-called subsistence theory, emphasized the consumption needed to sustain life and maintain the working population as the chief determinant of wage levels. The theory was adumbrated by mercantilist economists, elaborated by the Scottish economist Adam Smith, and developed fully by the British economist David Ricardo. Ricardo argued that wages are determined by the cost of barely sustaining laborers and their replacements and that wages cannot long depart from the subsistence level. If earnings should fall below that level, he contended, the labor force would not reproduce itself; if earnings should rise above it, more working-class children than the number needed to replenish the labor force would survive and wages again would be forced down to subsistence levels by the competition of laborers for the available jobs. Wages-Fund Theory After the decline of the subsistence theory, attention shifted to demand for labor as a wage determinant. The British economist John Stuart Mill, among others, propounded the so-called wages-fund theory to explain how the demand for labor, as expressed in the money employers have available to pay for labor, influences wages. The theory rests on the assumption that all wages are paid out of past accumulations of capital and that the average wage rate is determined by dividing the share set aside for wages by the number of employed workers. Wage increases for some workers could mean reductions for others. Only by augmenting the wages fund or by reducing the number of laborers could the wage level be raised. The wages-fund theorists were mistaken in assuming that wages are paid out of past capital accumulations. Wages actually are paid mainly out of current production. Wage increases, by strengthening buying power, may stimulate production and generate more wage-paying potential, especially if unemployed resources exist. The wages-fund theory was succeeded by the marginal-productivity theory, concerned mainly with the influence exerted by the demand and supply of labor. Proponents of the theory, which was developed largely by the American economist John Bates Clark (18471938), maintained that wages tend to be set at the point at which employers find it profitable to engage the last job-seeking worker, who is called the marginal worker. Because, by the principle of diminishing returns, the value of each additional workers contribution to production is supposed to diminish, growth of the labor force depresses wages. If wages should rise above the level assuring full employment, part of the labor force would become unemployed; if wages should fall below that level, competitive bidding by employers for the additional workers would push wages up again.

Marginal-Productivity Theory The marginal-productivity theory is defective in assuming perfect competition and in ignoring the effect of wage increases on productivity and buying power. As the British economist John Maynard Keynes, a vigorous critic of the theory, demonstrated, wage increases may bolster an economys propensity to consume rather than to save; expanded consumption creates new demands for labor, in spite of the higher wages that must be paid, if higher incomes can arise out of decreased unemployment. Most economists recognized, with Keynes, that higher wages need not cause reduced employment. A more serious danger that can result from wage increases is inflation, for employers are inclined to raise prices to compensate for large wage outlays. This danger can be averted only if wages are not allowed to outrun productivity. Because labors share of the national income has been virtually constant and is likely to remain so, real wages can rise mainly to the degree that productivity rises.

Sources: http://www.history.com/encyclopedia.do?articleId=225383 http://www.economictheories.org/2008/12/karl-marx-theory-of-wages.html http://encarta.msn.com/encyclopedia_761577040/Wages.html#s4