Wages

Meaning of Wages
The term wage means
Payments made for the services of labour

Benham says
as a sum of money paid under contract by an employer to a worker for services rendered

A wage payment is essentially price paid for a particular commodity viz labour services

Nominal Wage Vs Real Wage

Nominal wages are wages paid or received in terms of money Real wages determine the standard of living of a person. The following factors have to be taken into consideration:
Purchasing power of money Subsidiary earnings Extra work without extra payment Regularity or Irregularity of employment Conditions of work Future prospects

Theories of Wages
Old Theories
Subsistence Theory Wage Fund Theory Residual Claimant Theory Marginal Productivity Theory of Wages Taussig s Theory of Wages

Modern Theories
Demand and Supply Theory

Subsistence Theory
This theory originated with the Physiocratic School of the French Economist
It was developed by Adam Smith and Later by classical economists

According to this theory

Wages tend to settle at the level just sufficient to maintain the worker and his family at the minimum subsistence level If wages rise above subsistence level, the workers are encouraged to marry and to have large families. The large supply will bring the wages level down If wages fall below subsistence level, marriages and births are discouraged and under nourishment increases the death-rate. Ultimately, wages level go up again

Criticism
The theory dos not apply to advanced countries Subsistence level is more or less uniform for all working classes. This theory does not explain difference in wages in different employements Demand side is completely ignored. At demand side, employer sees work not the subsistence level Further, subsistence minimum is a very vague term

Wage Fund Theory

This theory is associated with the name of JS Mill According to this theory
Wages depend upon two quantities
Wage Fund
The circulating capital set aside for the purchase of labour

Number of labourers seeking employment

Thus, level of wages can be determined by dividing the wages fund by the number of workers In other words, wages vary directly as the quantity of capital and inversely as the number of workers

Criticism
Wages not necessarily come out of capital but maybe from production when production process is small There is not fixed wage fund The theory does not tell us about the sources of wage fund This theory assumes a degree of antagonism between labour and capital that does not actually exist This theory does not explain why wages differ in different occupations

Residual Claimant Theory

This theory was advanced by an American economist, Walker According to him
Wages are the residue left over, after the other factors of production have been paid

Criticism
It does not explain how trade unions are able to raise wages It ignores the influence of supply of labour on wages Why same law of demand and supply can be applied on wages It is not the worker who is the residual claimant but the entrepreneur

Marginal Productivity Theory of Wages

Marginal product of labour in any industry is the amount by which the output would be increased if a unit of a labour was increased, while the quantities of other factors of production employed in the industry remained constant Under conditions of perfect competition an employer will go on employing workers until the value of the product of the last worker he employs is equal to the marginal or additional cost of employing the last worker In simple, every worker will get wage rate equal to the value of marginal net product of his labour

Criticism
It is a static theory while actual world is dynamic According to this theory, there is single wage rate. However, it differs from place to place, person to person and employment to employment No perfect competition Productivity is also a function of wages. Low wage low productivity

Taussig s Theory of Wages

The American economist Taussig gives a modified version of the Marginal Productivity Theory of Wages According to him
Wages represent the marginal discounted product of labour Capitalist employer deducts some amount for his risk taking. He does not pay labour according to his marginal product

Two weakness identified by Taussig by himself

Dim and Abstract. Remote from the problem of real life

Modern Theory of Wages

Although labour has certain peculiarities and cannot be regarded as an ordinary commodity, still wages are determined by the interaction of the forces of demand and supply as in the case of ordinary commodity So there is
Demand of Labour Supply of Labour

Demand for Labour

The demand for labour by the individual firm is a function of both the productivity of labour and the money demand for the firm s product The demand for labour is derived demand
It is derived from the demand for the commodities

Demand for labour also depends on number of factors

Elasticity of demand Price and quantity of cooperating factors Technical progress

Supply of Labour
The supply of labour depends on
The number of workers of a given type of labour which would offer themselves for employment at various wage rates The number of hours per day or number of days per week they are ready to work

The supply of labour may mean:

Supply of labour to a firm
Supply of labour is perfectly elastic
Because at current wage rate a firm can employ any number of workers

Supply of labour to the industry

Not perfectly elastic. May has to attract from other industries Positive sloping supply curve

Supply of labour to the whole economy

Depends on economic, social and political factors or institutional factors

There is certain minimum wage below which labour will not work at all
Once this minimum point is exceeded, supply of labour will increase as the wage rate goes up After a point, this tendency will be reversed

Diagram

Interaction of DD and SS

Exploitation of Labour
As defined by Joan Robinson,
Labour is said to be exploited when the wage is less than the value of the marginal product (VMP), which is equal to the physical product multiplied by the sale of the price of the product

There is no exploitation competition as VMP=MRP

in

the

perfect

There can be exploitation of following types

Monopsonistic Exploitation Monopolistic Exploitation Double Exploitation

Types of Labour Exploitation

Monopsonistic Exploitation
Employer the sole purchaser so very powerful Labour occupies very weak position

Monopolistic Exploitation
Perfect Competition in the labour market Imperfect Competition in the product market
MR is less than price of the product so MRP is less than VMP Labour is paid less

Double Exploitation
Bilateral monopoly

How to stop Exploitation?

Government Action
Government sets minimum wage

Trade Union Action

Stopping exploitation Raising MP Raising Standard Wage Rate Increasing Labour demand

Wage Differentials
Causes which create differences in wages in different employments, professions and localities
Difference in efficiency
Inborn qualities, education, training and work conditions

Existence of non-competing groups

Geographical, social or economic reasons

Difficulty of learning a trade

The number of those who can master difficult trades is small

Differences in agreeableness or social esteem

Disagreeable employments must pay higher wages in order to attract labourers

Future prospects
Future promotion then people may attract low salaries

Hazardous and dangerous

Higher wages

Collective bargaining
Trade unions bargaining

Share of Wages in National Income

Factor affecting wages
Labour productivity
Wages per worker would be higher where the labour productivity is higher

Introduction of labour-saving machinery

Share of wage in aggregate national income would be less with introduction of labour-saving machinery

Condition of the labour market

More labour share will be low, low labour high share of wage

Mobility of labour
If labour is mobile, large share in national income

Growth of monopolies
Less share in case of monopolies

Export of capital
Less share in case of capital flight.

Cheaper imports
Real wages go up when cheap food is importable from other countries

Thank You