Wage Theories

Presented by-
Shehla Malik
09-MBA-55
Theories of Wages
Wage Fund Theory
Subsistence Theory
Surplus Value Theory
Marginal Productivity Theory
Residual Claimant Theory
Bargaining theory
Wage Fund Theory
 Propounded by Adam Smith and 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 and savings.
 The demand for labour and for wages is determined by
the size of the fund.
 Two important factors to increase the amount of wages:
 Fund should be large
 No. of workers should be reduced
• Criticisms:
 No emphasis on efficiency and productivity of labour.
 It is Unclear from where the fund will come.
 It does not explain the difference in wages at
different levels.
Subsistence Theory
 David Ricardo – Year 1817
 Iron Law of Wages
 Based on Assumption – if workers are paid more than
their subsistence wage, their numbers would increase as
they would procreate more; this would bring down the
rate of wages.

 Criticisms:
 Based on population.
No consideration for the demand for labour.
 No emphasis on efficiency of workers.
No explanation of wage differentials.
Surplus Value Theory
 Propounded by Karl Marx.
 Acc. to this theory – Worker is a commodity which
could be purchased at a very low cost.
 This theory is not applicable to large organizations.

 Criticisms:
 Labour was treated as a commodity or as article.
 Wages are not paid in proportion to the time spent.
 No emphasis was given on efficiency and
productivity of workers.
Marginal Productivity Theory
 Developed by Phillips Henry Wick steed(England)
and John Bates Clark(USA).
 It assumes – wages depend upon the demand for and
the supply of labour.

 Criticism:
 It is wrong to assume that more labour could be
used without increasing the supply of production
facilities.
 Employer offer wages less than the marginal
productivity of labour.
Residual Claimant Theory
 Francis A. Walker – enlarged this theory- “Theory 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.
 Four Factors of production – Land, Labour, Capital and
Entrepreneurship.
 The theory tries to prove that if the productivity of workers
increases, the production will increase and as a result there
will be increase in residual claimant.
 Criticisms:

 Wages not dependant on the profits or the capacity

of an organization.
Workers efficiency and productivity were not taken
into consideration.
Bargaining Theory
 Propounded by John Davidson
 Wages are determined by the bargaining power of
workers or trade unions.
 Basic wages, fringe benefits, job differentials etc tend to
be determined by the relative strength of the
organization and the trade union.
 Criticisms:
 If trade union is not strong enough to bargain with
the management, the workers would be paid less
wages.
 Length of service of workers, efficiency,
performance does not taken into consideration.
THANK YOU