Wage theories

Meaning and Definition

• Wage: Payment for labor or services to a
worker, especially remuneration on an hourly,
daily, or weekly basis or by the piece.
• In economic theory, wages reckoned in
money are called nominal wages, as
distinguished from real wages, i.e., the
amount of goods and services that the
money will buy. Real wages depend on the
price level, as well as on the nominal or
money wages.
 Economic Theories about Wages
• Many theories have been advanced to
explain the nature of wages. The first
of them was the subsistence theory of
wages, also called the “iron law of
wages,” of which David Ricardo was one
of the main exponents.
 Modern wage theory of wage
• Wage is a price of productive labour.
The marginal productive theory, indeed,
provides fairly satisfactory explanation
of wage determination but its main
shortcoming is that it does not consider
the supply aspect of labour and
concentrate on demand side.
• The modern theory of wages is an
extension of this theory in more logical
and rational way.
• Here, the wage rate, is determined by
the interaction of the forces of demand
for and supply of labour in given market
situation.
The demand for Labour
• Productivity of labour
• Technology
• Demand for the product.
• The price of capital input.
 Shift in demand for labour
• The industries demand as a whole
represent the market demand for labour.
• An industry is collection of firm.
Shift in demand for labour
Y

d D2
e
m D
a
Productivity

n
d
D1
Increase
Decrease

MRP2
MRP1 MRP
O X
Demand for labour unit
 Wage determination under
competitive condition
Industry Market Firm
Y Y

D SL
Wage Rate

E (Labour supply curve ) AW=MW

W W
(Wage line) AC=MC of
labour

S DL

O N X O X
Units Of Labour Units Of Labour
 Relation between Wage and
Managerial Productivity
X X

0 Y 0 Y
Y

0 X
Y Y

0 X 0 X
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