THEORIES OF DETERMINATION OF WAGES

WRITTEN BY-SUDHANSHU KUMAR SAINI

 Labour is human factor and the payment made to the labourer for
his mental and physical labour is called wages.

 According to professor BENHAM “A wages may be defined as a

sum of money paid under by an employer to a worker for services
render”

 Wages may define in two ways.

 Narrow way- wages refers to the amount which paid to labour in
monetary terms against for the services of labour
 Wider way- wages refers not only monetary terms it may be in
form of commodity and it not only paid to worker or labour it also
paid to farmer , advocate , doctors , businessman in form of salary
or profits.
TYPES OF WAGES
 Nominal wages- Nominal wages are actual wages which is
received by labour in the form of money. The limitation of this
wages is that the actual status of labour cannot be known; as a
result real wages have to find out.
 Real wages- Real wages is purchasing power of money that will
increase during inflation. [direct relation between price and
purchasing power]
It also includes facilities given to labour during it jobs ex- medicals,
housing, education to children etc.
 REAL WAGES=PURCHASING POWER OF NOMINAL WAGES +OTHER
FACILITIES.
 Time wages- When wages paid to the labour on the basis of time
it known as time basis wages. For ex- during working hours
employees for which they received extra wages or salary.
 Piece wages- When wages paid on the basis of number of piece of
product manufactured by labour for ex- After certain amount of
manufacturing the product say 20 unit after that if worker
produce then he will paid extra for that unit.
 Cash wages- It refers to the wages paid to the labour in terms of
money. The salary paid to a worker on daily basis is example of
instance of cash wages.
 Contract/ task wages- Under this type, the wages are fixed in the
beginning for completed work. For ex- contractor fixed the price
of construction Rs.25000.

FACTORS AFFECTING REAL WAGES

 Purchasing power of money- In rural area purchasing power of
money is more than in comparison of urban area. Hence, there
will be direct relation between purchasing power of money and
real wages.
 Extra facilities- Real wages also affect by the extra facilities given
to the employees by the employers.
 Nature of business- Real wages depend upon the nature of
business. If business nature is Peaceful and healthy then it has
more purchasing power as compare business which are
dangerous in nature. For ex- tea worker and coal worker.
 Hope of future promotion- if the labour has less nominal income
but more real income on other hands, coal mine worker has more
nominal income but less real income.
 Social status- Those businessman have respectable status in
society are have more real income and those who have
unrespectable status that have less real income.
 Other factors- Permanent employment, Extra earning,
Appointment of dependents, Hours of work and leisure, etc.
THEORIES OF WAGES
 THE SUBSISTENCE THEORY OF WAGES
 This theory of wages was propounded by French physicorat
economists specially Turgot in 18th century. Later on economist
like Ricardo and Adam smith have support it.
 It also known as Iron law of wages
 Subsistence means minimum requirements
 According to this theory, wages always equal to the subsistence
level. It means labour earn that much amount through which he
can able to fulfill the minimum requirement of his own and his
family.
 Wages always fixed at subsistence level.
 Assumption of this theory
 If supply of labour increase wages decrease or vice-versa.
{Inverse relationship}
 With the increase in wages the population also increase or
vice-versa. {Direct relationship}
 If wages more than subsistence level then population increase or
labour supply due to that wages decrease. It will continue till
wages equal to subsistence level.
 If wages less than population decrease due to that wages increase
it will continue till wages equal to subsistence level.
Criticisms
 This theory of wages explains wages from the supply side and
ignores the demand side.
 The theory explains that the standard of living remains constant
and wages rates should also remain constant. But actual practice
there is frequent changes in wages rate while the standard of
living does not change frequently.
This theory says population increase with good economics status
of labourer is not true.
 The theory eliminates the possibility of enhancing ability of
labourer or development of laborer by labour through supporting
view of same standard of subsistence of workers.
 Standard of living theory of wages
 This theory is the modified form of subsistence theory of wages.
 According to this theory, laborer should be paid wages which are
not equal to subsistence level but which are appropriate to
maintain their standard of living, for which they are habitual.
 Wages only up to subsistence are not enough but should be such
so that living standard [necessities + comfort + luxury} of worker
and his family could be maintained.
 This wages would definitely be high and would enhance ability
and productivity.
 ASSUMPTION
 The standard of living will maintain the efficiency of workers
high wages rate is desirable from the point of view of high
productivity of worker.
 If the workers have attained a high standard of living they
will try maintaining it and more work and less leisure is
preferred.
 The higher standard of living of workers will motivate them
to save something and their bargaining power with
employer will increase.

CRITICISMS
 The theory is one sided as it emphasizes on the supply of
labour and does not explain the demand of labour.
 The theory explains wages depends on standard of living but
contrary, wages determine the standard of living.
 This theory explain standard of living and wages are
constant but actually both are change frequently.