What do you mean by wages? Explain critically the important theories of wages

Wages are remuneration paid to labour in return for the services rendered. The term labour in Economics is used in under sense. It includes the work of skilled or unskilled professional or amateur, salaried or non-salaried persons etc who put the efforts mentally or bodily in return for some reward. The reward may be paid in cash or in kind or in both. The unit of time for the payment of remuneration may be a day, a week, a month or a year.

Benham has defined the term ‘wages’ in a restricted sense. According to him ‘a wage may be defined as a sum of money paid under contract by an employer to a worker in exchange for services rendered.

Theories of Wages

1.         Subsistence Theory

This theory originated with Physiocrats and was commonly accepted during the 18^th century. The German economist Lassale called it the ‘Iron Law of Wages’. Karl Marx made it the basis of his theory of exploitation. According to this theory wages tend to settle at the level just sufficient to maintain the worker and his family at a minimum subsistence. If for some reason wages rise above this level, it is said that the workers would be encouraged to marry, their numbers would increase by higher birth rate until the larger supply of labour brings down the wages to the subsistence level. If on the other hand wages fall below this level, marriages and births are discouraged, under nourishment increases the death rate and ultimately labour supply is decreased. Hence wages will rise and reach the subsistence level.

In this theory, it is supposed that the supply of labour is infinitely elastic. That is its supply would increase if the price offered rises.

Criticism: This theory seems to be applicable to backward countries like Pakistan where labourers are extremely poor and their standard of living incredibly low. But the theory does not apply to more advanced countries. Evidently the theory is based on Malthusian Law of Population.

But it is wrong to say that every increase in wages must inevitably be followed by an increase in birth-rate. An increase in wage maybe followed by a higher standard of living, which in turn influences the wage level. Another criticism of the theory is that the subsistence level is more or less uniform for all working classes with certain exceptions. The theory thus does not explain differences of wages in different employments.

Further, the fundamental wakens of the subsistence theory lies in its long-term character. It explains the adjustment of wages over the life-time of a generation and does not explain fluctuations from year to year. As such it has little practical value.

2.         Wages Fund Theory

This theory is associated with the name of J. S. Mill “Wages” wrote Mill, “depend on the demand and supply of labour or as it is often expressed on the proportion between population and capital. By population here it meant the number of the labouring classes or rather those who work for hire and capital only circulating capital, and not even the whole of that but the part which is expected on the direct purchase of labour.”

According to this theory, wages depend on the quantities (i) the wages fund set aside by the employer for the payment of wages and (ii) the number of labourers seeking employment. The actual rate of wage can be found by dividing the fund by the number of workers.

According to this theory therefore wages cannot rise unless either the wages fund increases or the number of working class people decreases. According to the advocates of this theory, if the wages are pushed up by strikes, it will be simply at the expense of employees. Their profits will decrease, capital will emigrate and the workers themselves will suffer as a consequence of decrease in the volume of employment.

Criticism: The theory has been widely criticized and even Mill himself recanted from it in the second edition of his “Principles of Political Economy.” There is no wages fund rightly fixed by employer for payments of wages. If it is worthwhile to employ more labour, the employers some how manage to find out more capital for paying to this additional labour.

When the theory says that the wages can be ascertained by dividing the fund by the number of workers, it is mere truism. It simply tells us what is self-evident and does not give satisfactory explanation of the determination of wages.

Further, it assumes a degree of antagonism between labour and capital that does not exist. Wages are not always increased at the expense of capital. During a boom both wages and profits increase.

Farther it is wrong to assume that forcing up of the wages will necessarily drive capital abroad. Capital is not so sensitive.

This theory does not help us to understand why wages differ in different occupations.

Finally the wage rates in different countries do not correspond to the total amount of capital available. In a few countries where capital is scanty, the wages are high.

3.         Residual Claimant Theory

This theory was advanced by the American Economist Walker. According to him, wages are residue leftover after the other agents of production have been paid. Walker says that rent and interest are governed by contracts, profits are determined by definite principles and that there are no similar principles operating in regard to wages. Out of the total production, therefore, when rent, interest and profit have been paid, the remainder goes to the workers as wages.

As compared with previous two theories, this theory is quite optimistic. It holds out to the workers a possibility of increasing their wages and thus bettering their lot if they worked hard. If by working more they produce more, then according to this theory, the whole of the extra production will go to them.

The theory admits the possibility increase in wages through greater efficiency of labour. In this sense, it is an optimistic theory, where as the subsistence theory and wages fund theory are pessimistic.

Criticism: This theory too has been rejected by most economists. In first place it does not explain how trade unions are able to raise wages.

Secondly it ignores the influence of supply of labour on wages.

Thirdly one fails to understand why the same laws of demand and supply that explain the remuneration of other factors of production should not be applied to wages as well.

Finally the residual claimant is not the worker but the entrepreneur, who undertakes to pay other factors of production before he can expect to get any thing.