Modern Theories of Wages

Just like the Theories of Employee Welfare, Modern Theory of Wages are equally important for the EPFO EO examination. Though questions from Modern Theory of Wages have yet not been asked in the examination, it is another potential area where questions can be expected. This article explain the theories of labour welfare, the most important ones from the exam point of view.

Wages Fund Theory

• Adam Smith, the famous classical economist, developed this theory.
• It assumes that workers are paid wages out of a pre-determined fund of wealth (usually savings) that he has called wages fund.
• According to him, the demand for labour and rate of wages depends on the size of the wages fund. So, if the wages fund is large, wages would be high and vice versa.

Subsistence Theory of Wages

• This theory was developed by David Recardo.
• According to this theory, the labourers are paid minimum wages called ‘subsistence wages’ to enable them to subsist and perpetuate the race without increase or diminution.
• It assumes that if workers are paid wages more than subsistence level, the number of workers will increase and it will lead to decrease in wages to subsistence level.
• Whereas, if workers are paid less than subsis­tence wages, the number of workers will decrease due to death, starvation, hunger, among other factors. It will increase wage rates again to subsistence level.
• This theory is often called Iron Law of Wages’, as wage rate remains at subsistence level at all times.
• It is often criticised for being a one-sided theory as it explains the wages from the supply side only and ignores the demand for labour.

The Surplus Value Theory of Wages

• This theory was developed by Karl Marx.
• This theory assumes that like others, labour is also a commodity, which could be purchased. To purchase labour, price is paid in the form of wages.
• This payment is at a level that is much lower than the efforts a labour puts in to produce items and the surplus goes to the owner.
• The labour that is not compensated is called ‘surplus labour’.

Residual Claimant Theory

• This theory was developed by Francis A. Walker.
• According to this theory, there are four factors of production, viz., land, labour, capital, and entrepreneurship.
• He states that once all other three factors are rewarded what remains left is paid as wages to workers.
• Thus, he propounds that, worker is the residual claimant in the four factors of production.
• It is criticised as it ignores the supply side factors in the determination of wages.

Marginal Productivity Theory

• This theory was propounded by Phillips Henry Wick-steed and John Bates Clark.
• This theory states that wages are calculated based on the production contributed by the last worker, often called the marginal worker and his/her production is called ‘marginal production’.

The Bargaining Theory of Wages

• This theory was developed by John Davidson.
• He believed that the fixation of wages would depend on the bargaining power of workers/trade unions and of employers.
• If workers are stronger in bargaining process, then wages would be high. In case, however, employer plays a stronger role, then wages would be low.

Behavioural Theories of Wages

• Behavioural scientists like Herzberg, Maslow, among other scientists, believed that wages are determined by norms, traditions, customs, goodwill, and social pressure.
• It has lately become one of the most important theories of wages in labour law.
• Their theories are based on elements like employee’s acceptance to a wage level, the prevalent internal wage structure, and employee’s consideration on money.

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