Select Wage Theories And Economic Issues Economics Essay


Wages are dependant on both the source and demand of particular type of labour. The factors which effect wages are source, price, skill, experience, potential, reputation. The income theories have important insurance policy implications plus some relevance for several occupations or in certain regions, none of the is adequate as an over-all theory having common applicability. The monetary theories of income fail to provide a complete reason of the problem of wage conviction. Studies conducted by behavioral experts somewhat fill the gaps in the earlier theories, that have highlighted the value of emotional and sociological factors on salary. The main element issues developed by economical and behavioral theorists are briefly researched in this chapter.



David Ricardo in his famous reserve on `Guidelines of Political Market and Taxation' propounded the subsistence theory of salary: Ricardo state governments that the price tag on labour depends after subsistence of labour. The theory was predicated on the assumption that if the personnel were paid more than subsistence wage, their statistics would increase as they would procreate more; which would bring down the pace of wages. If the wages show up below the subsistence level, the amount of workers would decrease - as many would die of being hungry, malnutrition, disease, cool, etc. and many wouldn't normally marry. This will result in reduced labour supply, which will ultimately be equal to the demand for it. Ricardo seen that the market price of labour could not change from the subsistence level for a long period. For this reason, the subsistence wage theory was also called the" Iron Law of Wages".

The subsistence theory of wages is generally related to David Ricardo, and takes on a large role in Marxist economics. Most modern economists dismiss the idea, arguing instead that pay in market economy are determined by marginal productivity.


This theory owes its development to Karl Marx. Matching to the theory, the labour was articles of commerce, that could be purchased on payment of 'subsistence price. ' Marx in lots of ways is nearer to Ricardo in his method of the question of value for labour ability. He accepted Ricardo's view that the market price of labour electric power cannot for long depart from the value of the subsistence which is necessary for the maintenance of this labour vitality. He, however, seen that it was not the inclination of population, which brought pay to the subsistence level, but it was the tendency in the capitalist system to persistent unemployment and the life of commercial reserve army, which drove pay to the subsistence level. The supply of labour always tended to be kept in excess of the demand for it by a particular feature of capitalist income system. The capitalist was able to force the worker to spend additional time of his job than what was essential to earn his subsistence income. The price of any product was dependant on the labour time needed for producing it.

According to Marx, the employee didn't get full reimbursement for enough time he allocated to the job. The speed of surplus value, which is the ratio of surplus labour to necessary labour, is also known as the `rate of exploitation' under the capitalist form of production. Marx, however, organised the view that the introduction of trade union bargaining and similar interferences could stop the inclination of wages dropping to their lowest level and even reverse it.

THE WAGES Finance THEORY (1723-1790)

This theory originated by Adam Smith. His basic assumption was that wages are paid of your predetermined finance of prosperity which place surplus with wealthy persons - consequently of savings. It had been how big is the fund, which determined the demand for labour and the salary paid to them. Corresponding to wages account theory, income are determined by: (a) the wage fund or part of working capital which includes been expended for acquiring the services of labour; and (b) the number of workers seeking job. The wage fund was assumed to be fixed and it generally does not change. Any change in wage rate, therefore, would be credited to improve in the amount of workers seeking career.

The wages fund theory managed that the wage rate might increase as time passes due to a rise in wage fund caused by higher savings or a decrease in the size of workforce. It revealed that the level of wages established the production of labour. If a growth in wages could augment the efficiency of labour, it could presumably augment the employers ' demand for that labour as well, revitalizing them to set out more cash in the purchase of labour. Hence, a rise in wage level not only affects the source conditions of labour but also triggers a switch in the demand for labour. That is quite complete opposite to the assumption made by the theory that the demand for labour is set.


This theory was developed by Phillips Henry Wicksteed (Great britain) and John Bates Clark (USA). Relating to this theory, income are based after an entrepreneur's estimation of the value that will probably be made by the previous or marginal worker. The marginal production theory assumed that there was a certain level of labour seeking job and the wage rate at which this labour could secure employment in a competitive labour market was equal to the addition to total creation that resulted from using the marginal unit of that labour force. It had been also assumed that development is carried out under the conditions of diminishing earnings to labour. The process of diminishing marginal production postulates that the contribution of every additional device of labour would be less than that of the unit previously hired. Therefore, despite the actual fact that the efficiency of the average person labourer may be higher than that of the marginal labourer, he will not be paid more than what the marginal labourer are certain to get.

In the brief run income rate can be both higher and less than the marginal earnings output of labourers, but in the long run it gets equalised with the marginal revenue productivity of labourers. When the prevailing income rate is lower than marginal output, it will be profitable for the employers and the resulting competition among employers to hire more staff will tend to raise the income. On the other hand, if the prevailing income rate is higher than the marginal efficiency, the occupation of marginal employees will yield him deficits and he'd stop utilizing them. This will bring about competition among personnel for careers, which would lower the salary. Thus in the long run the equilibrium income rate can be add up to the marginal earnings output of labour.

The marginal productivity theory is considered superior to the sooner theories on pay.


John Davidson propounded this theory. He argued that the income and time of work were eventually dependant on the comparative bargaining strength of the employers and the employees.

According to this theory, there can be an higher limit and a lesser limit of wage rates and the actual rates between these limits are determined by the bargaining ability of the employers and the personnel. The upper limit could be the highest income that the employers would be inclined to pay beyond that they will incur losses resulting from high labour costs. The low limit could be either the minimum amount wages recommended under the statute or the strength of amount of resistance of the workers at the subsistence pay below that they will never be available for work.


This theory is given by Marshall. He assumed the complete group of factors which govern demand for and supply of labour influenced the willpower of wages. It is therefore necessary to understand the various factors, which effect the demand for and offer of labour. The employers' demand for labour would depend on a number of factors including the demand for his/her product, availability of other factors of creation (the most important being the way to obtain capital), the amount of technological improvement, etc. The demand price of labour is determined by the marginal output of individual employee.

The term way to obtain labour can be expressed in several senses. First, it identifies the number of workers seeking employment. These are the workers without substitute livelihood join the labour market seeking job for wages. Secondly, it may be the amount of hours that each employee is available for work. The way to obtain labour in this sense has been increased by a rise in the number of working hours. Finally, the way to obtain labour varies with the strength of work. The way to obtain labour will increase if the staff work harder than before.

Thus, Income rates are influenced by a number of factors governing the demand for and offer of labour. The marginal productivity of labour, determines its demand price. It is the quality lifestyle of workers that plays an important role in the persistence of source price of labour. The particular wage rate is set at that level where the demand for and supply of labour are equal.

In real world, however, labour marketplaces are usually non-competitive. The wage levels likely to derive from the free interaction of demand and offer are often modified by the level of resistance from workers to accept wages below the subsistence level; trade union action, federal intervention in income fixation, and immobility of individuals.


Lord Keynes in his book "General Theory of Occupation, Interest and Money" explained the concept of purchasing power. According to him, wage is not only the price of production to the workplace but also money for the wage earners who constitute a majority in the total working population. Exactly the same workers and their families consume a significant part of the products of the industry.

Hence, if the wage rates are high they have more purchasing ability, which would improve the aggregate demand for goods in addition to a advanced of productivity. Conversely, if the wage rates were low, their purchasing electric power would be less, which would bring in regards to a street to redemption in the aggregate demand. This can have an adverse effect on the degrees of employment and productivity. Matching to Keynes, unemployment and depressive disorder will further enhance the problem. Therefore, a trim in wage nationwide income falls; it would have a detrimental effect on career rate.

According to the Keynesian Theory, fill up occupation is a function of national income; the higher the amount of national income the greater the quantity of employment and both income and occupation are determined by effective demand. Hence, if the countrywide income falls, it would have an adverse effect on career.


Economists focusing on international trade argued about countries, companies and companies fighting on the basis of comparative advantage of cheap labour Employers are known to move to areas where labour is cheap, whether it be inside a country or across countries. Subject to internal and exterior constraints, labour also will show a tendency to move to areas, which pay higher value for their skills and work. In recent years, however, there exists pressure on countries and companies contending based on cheap labour to ensure compliance with minimum key labour standards relating to minimum age, freedom of association, to collective bargaining forced labour and non-discrimination.


1. Corresponding to Subsistence theory, the assumption that the way to obtain labour is flawlessly flexible at the subsistence wage level is inappropriate. The theory will not consider wage differentials, which can be bound to are present across areas.

2. The subsistence theory ignores the value of the role of the demand for labour and the role of trade unions in wage persistence.

3. Economic theories either expect that pay and prices are either totally fixed or completely flexible. The truth lies somewhere in between.

4. Most wage theories derive from the assumption of full job. In most developing countries this isn't really the case.

5. Labour is not as mobile as capital and products are. Therefore wage rates could be inspired by the changes in the demand for and offer of factors apart from labour too.

6. Salary and benefits indicate industry characteristics and personal characteristics (including skill differentials) as well as societal personal preferences and prejudices.

8. Interference by federal and trade unions could minimize the influence of the market causes of demand and offer of labour.

9. Technology and productivity are major determinants. Low salary may not mean low wage costs. Likewise high wage rates might not exactly mean high product labour costs.

10. Together with the growing pressure for linking labour benchmarks with international trade, significantly it'll become difficult (for countries, sectors and companies) to compete based on comparative advantage of cheap labour.


Behaviour means naturally reaction or activity to the environment and yourself. Determination is the process of attempting to affect others to do your projects will through the possibility of gain or reward. Every pay back or element or payment/remuneration has a behavioural aim and seek to satisfy a need (physiological or psychological) and achieve a goal. Luthans argues that `inspiration is an activity that starts off with a physiological or psychological deficiency or need that activates behaviour or a drive that is targeted at an objective.

Reward systems are targeted at compensating people because of their skill, effort, responsibility and working conditions and motivating them for higher performance.

Behavioural science theories are labeled into three categories:-

Content theories

Process theories, and

Contemporary theories


The content theories clarify what motivates people at work. Maslow, Hergberg and Alderfer contributed significantly to content theories. These are extremely briefly explained as follows:-


Abraham Maslow suggested the first theory called the hierarchy of needs theory. He proposed a hierarchy of five needs physiological (food, shelter, clothing which wages can purchase), protection (emotional and physical safety - health insurance, pension), and love (affection and affiliation - belongingness, public), esteem (electric power, achievement, status, etc. ), and self- actualisation (personal expansion, realization of potential). Maslow believed that within every individual, there is a hierarchy of five needs and each level of need must be satisfied before an individual pursues the next higher-level of need. As a person progresses trough the many levels of needs, the proceeding needs loose their motivational value.

TWO FACTOR THEORY OF Inspiration: Herzberg expanded work of Maslow and developed a particular content theory of work desire. Two-factor theory of motivation by Friedrich Hergberg classifies rewards into two categories: intrinsic and extrinsic. They are also known as as motivators (satisfiers) and cleanliness factors (dissatisfiers). Intrinsic rewards are motivators and satisfiers related to job content. They include success, recognition, work itself, responsibility, job enrichment, and job enhancement. Extrinsic rewards are hygiene factors and job dissatisfiers. Included in these are company insurance policies and administration, supervision, salary, interpersonal relations, working conditions.

ERG THEORY: Clayton Alderfer identified 3 groups of primary needs; they are- Presence, Relatedness and Development.

(a) The lifestyle needs are worried with success.

(b) The relatedness needs stress the value of social and social romantic relationship.

(c) The development needs are concerned with individual's intrinsic desire to have personal development.

Based on someone's background and social environment, one set of needs may precede over others.

The works of Maslow, Hergberg and Alderfer are referred to as content ideas. They are useful, but have limited implications for plan and practice.


Process ideas were reviewed by work of Vroom (on valence and expectancy) and Porter and Lawer (performance-satisfaction linkage). They look at the cognitive antecedents that get into motivation or work, particularly the way they relate to each other.

EXPECTANCY THEORY: Victor Vroom proposed expectancy theory predicated on the principles of valence, expectancy and instrumentality. Valence identifies an individual's choice for a specific outcome. For example, most older employees might value retrial benefits against fewer, if any, more radiant workers in today's knowledge industry, Younger, sole (unmarried) personnel with fewer family responsibilities have less or no dependence on benefits like children's education, health advantages, leave travel concession, etc. than elderly, married people who have a number of children. Instrumentality could imply that an individual would be determined to give superior performance (first-level result) in expectation (expectation) of campaign (second-level final result).

Expectancies are mental and cognitive. Expectancy is the degree of probability a particular action or work will lead to particular first-level benefits whereas Instrumentality identifies the amount of likelihood that relates first-level effects and desired second-level outcomes. Although the concept of expectancy appears to be exactly like that of instrumentality, expectancy relates work to first-level benefits while instrumentality relates first-level results and second-level final results. In simple words, Desire is a -function of valence and expectancy.

According to Vroom's idea it could be interpreted that: Individual gives company what it prices, superior performance and desires, in return, campaign. He provides insights into the conceptual determinants of desire. Though he doesn't offer specific recommendations on what motivates, and his theory as based on the assumption that people are rational and logically determining, true to life situations may well not be so idealistic.


The contemporary theories describe the present day concept of how people motivates at work. These include Equity and Attribution theories. These are explained the following:-


J. Stacy Adams, suggested equity theory, and argues a major type into job performance and satisfaction is the degree of collateral (or inequity) that people understand in their work situation. Inequity occurs whenever a person perceives that the percentage of his / her effects to inputs and the percentage of another other's benefits to inputs are unequal.

Equity can be internal or external. Internal equity identifies the pay differential between and among the many skills and degrees of responsibility. Internal equity is established through job evaluation. External equity refers to concerns how wage/pay levels for similar skill levels in one firm equate to those in other organizations in similar or same industry and location/region. Exterior equity is assessed usually through pay surveys and pay satisfaction surveys. Companies, which pay significantly less than the market rates, would find it difficult to attract, maintain and motive people to perform better.

People feel miserable not only when they receive less than what they consider they need, but also when they acquire more than what they consider they should have. When an employee gets more than what he/she considers is fair, they commence to ponder whether others too are acquiring more than what they should have. Now the question come up is to compare what they are receiving, whether others are obtaining a lot more than what they are entitled to.


This theory is contributed by Fritz Heider, Lewin and Festinger. They expect that folks are logical and rational in their behavior which both inside and external makes combine additively to ascertain behaviour. People will respond in a different way if the realize that their benefits are controlled more internally than externally. This theory has great potential for understanding organisational behavior and provides deep insights on goal setting, leadership behavior and diagnosing causal factors of employee performance.


1. Explain the value of the theory of wages.

2. What exactly are the several types of theory of salary? Explain at length.

3. Are wages determined only on the basis of the demand and offer of labour?

4. Explain the significance of behavioural theories in Wages dedication?

5. What exactly are the restrictions that occur while wages persistence in economic ideas?

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