This article throws light upon the four main theories of wages. The theories are:- 1. Subsistence Theory. 2. Wage Fund Theory. 3. Marginal Productivity Theory. 4. The Bargaining Theory of wages.
1. Subsistence Theory:
It states that wages tend to keep to a level that will provide the workers only with bare subsistence. If wages for a time rise above this level, it inevitably leads, it is said, to an increase in the population, and increased competition among workers for employment, causing wages to fall again. If wages fall below subsistence level, fewer children are born and malnutrition raises the death-rate, so that competition for employment is reduced and wages tend to rise.
2. Wage Fund Theory:
At the time when the wage fund theory was developed it was thought that a fund of capital had to be accumulated in advance before wages could be paid. Thus the size of the fund limited the total amount available for payment of wages.
Though the theory did not specifically say so, it appeared to imply that if one group of workers obtained a rise in wages it could be only at the expense of other workers, whose share of fund was thereby reduced. The theory ignored the fact that total output could increase and the wage-earners might also be able to benefit at the expense of capital.
3. Marginal Productivity Theory:
According to this theory, the higher the wage, the smaller the amount of labour the entrepreneur will employ. Additional labour will be employed till the last addition to the total value of the product is only just covered by the wages paid to the marginal or the last worker taken on, without leaving any profit. Apparently, an employer cannot afford to pay more than the wealth produced by the labourer.
As the number of labourers increases, the productivity of each successive worker goes on decreasing. Ultimately a stage is reached where the productivity of the last or the marginal labourer is just equal to the wages paid to him.
His contribution to production is known as Marginal Productivity. He is just on the margin of being employed or dismissed. It may be said that the maximum limit beyond which rates of wages cannot be paid to a labourer, is determined by its marginal productivity to the employer.
4. The Bargaining Theory of Wages:
Earlier theories of wages have been rendered invalid or atleast inadequate, as a result of collective bargaining by trade unions. Collective bargaining provides an example of what is sometimes called bi-lateral monopoly, the trade union being the monopolist supplier and the employer’s association, the monopolist buyer of a particular kind of labour. Level of wages in an industry depends on the bargaining strength of the trade union concerned.
The power of a trade union depends on the size of its membership, the size of its fighting fund and the extent of the dislocation to the national economy it can cause by a strike. In times of full employment, the union will be in a strong position, in a depression they will be weaker.