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COMPENSATION
Compensation theories mainly divided
into two parts:
• Economic theory
• Behavioral theory
• Wages are determined by both the supply and
demand of particular type of labour. The
factors which influence wages are supply,
price, skill, experience, ability, reputation.
• The economic theories of wages fail to provide
a complete explanation of the problem of
wage determination. Studies conducted by
behavioral scientists to some extent fill the
gaps in the earlier theories, which have
highlighted the importance of psychological
and sociological factors on wages.
Economic theory consist the following
• SUBSISTENCE THEORY
• THE SURPLUS VALUE THEORY
• THE WAGES FUND THEORY
• THE MARGINAL PRODUCTIVITY THEORY
• THE BARGAINING THEORY
• DEMAND AND SUPPLY THEORY
• PURCHASING POWER THEORY
• COMPARATIVE ADVANTAGE THEORY
SUBSISTENCE THEORY (Given by DAVID RICARDO in
1772-1823)
• it states that if the workers were paid more than subsistence wage, their
numbers of labour would increase as they would reproduce more; and this
would bring low the rate of compensation. If the rate of compensation
decreased below the subsistence level, the number of workers would
reduced – as many would die because of lack of food or hunger, increased
inability due to scarcity of nutrition, abnormal health conditions, cold, etc.
and many of them could not marry because they fell that they could not
able to accept the responsibility . This will result in decreased labour
supply, which will lastly be same like as the demand for it. Ricardo viewed
that the market price of labour could not vary from the subsistence level
for a long time. For this reason, the subsistence wage theory was also
known as the” Iron Law of Wages”
THE SURPLUS VALUE THEORY (Given
by KARL MARX in 1818-1883)
• According to this theory, the labour was an article of trade,
which could be purchased on payment of ‘subsistence
price.’ Marx in many ways is closer to Ricardo in his
approach to the question of value for labour power. He
accepted Ricardo’s view that the market price of labour
power could not for long depart from the value of the
subsistence which is required for the maintenance of that
labour power.
• He, however, viewed that it was not the tendency of
population, which brought wages to the subsistence level,
but it was the tendency in the capitalist system to chronic
unemployment and the existence of industrial reserve
army, which drove wages to the subsistence level.
• Labour supply always cared for the excess of the
demand for it of capitalist wage system. The
capitalist was in a position to force the worker to
spend more time of his job than what was
necessary to earn his subsistence wage.
• The price of any product was determined by the
labour time needed for producing it. According to
Marx, the labour did not receive complete
remuneration for the time he spent on their work
place or job. Marx, however, held the view that
the introduction of trade union bargaining and
similar interferences could stop the tendency of
wages falling to their minimum level and even
reverse it.
THE WAGES FUND THEORY (Given by
ADAM SMITH in 1723-1790)
• As per this theory wages are paid out of money which lay
surplus with wealthy persons – as a result of savings. It was
the size of the fund, which determined the demand for
labour and the wages paid to them. According to wages
fund theory, wages are determined by:
(a) the wage fund or part of working capital which has been
increased for getting the labour
(b) the number of workers seeking employment.
The wage fund was assumed to be fixed and it does not
change. Any change in wage rate, because of increase or
decrease in the size of labour getting job opportunity.
• The wages fund theory based on the
productivity of labour and profitability of any
organization it shows that increased in the
savings increased in the wages, it may change
after the fixed tenure. Increase in
remuneration could help to increase the
efficiency of labour, it would presumably
augment the employers’ demand for that
labour.
• Hence, a rise in wage level not only influences
the supply conditions of labour but also
causes a shift in the demand for labour.
THE MARGINAL PRODUCTIVITY
THEORY
• This theory was propounded by Phillips Henry
Wicksteed (England) and John Bates Clark (USA).
According to this theory, compensation are based upon
an entrepreneur’s calculation of the rate that will
probably be acquire by the marginal worker.
• The marginal productivity theory pretended that there
was a certain quantity of worker received the job and
the remuneration value at which this worker could
secure employment in a competitive labour market
was equal to the addition to total production that
resulted from employing the marginal unit of that
labour force.
• It was also pretended that production is carried
out under the conditions of diminishing returns
to labour. The principle of diminishing marginal
productivity postulates that the contribution of
each additional unit of labour would be less than
that of the unit previously hired.
• Therefore, in spite of the fact that the
productivity of the individual labourer may be
higher than that of the marginal labourer, he will
not be paid more than what the marginal
labourer will get.
• In the short run wage rate can be both higher and
lower than the marginal revenue productivity of
labourers, but in the long run it gets equalised with the
marginal revenue productivity of labourers.
• If the prevailing wage rate is lower than marginal
productivity, it will be profitable for the employers and
the resulting competition among employers to employ
more workers will tend to raise the wages.
• On the contrary, if the prevailing wage rate is higher
than the marginal productivity, the employment of
marginal workers will yield him losses and he would
stop employing them. This will result in competition
among workers for jobs, which would lower the wages.
• Thus in the long run the equilibrium wage rate will
become equal to the marginal revenue productivity of
labour.
THE BARGAINING THEORY (JOHN
DAVIDESON)
• John Davidson propounded that the wages and time period
of work were ultimately defined by the relative bargaining
power between the employers and the employees.
• There is a top limit and a lower limit of compensation and
the actual wage rates in between these limits are set or
calculated by the bargaining power of the employers and
the employees.
• The upper limit could be the highest wages that the
employers would be willing to pay beyond which they will
incur losses resulting from high labour costs. The lower
limit could be either the minimum wages prescribed under
the statute or the strength of the workers at the necessary
remuneration below which they will not be ready for work.
DEMAND AND SUPPLY THEORY (MARSHALL)