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Subsistence Theory of Wages Explained

There are several theories that attempt to explain how wages are determined: 1. The subsistence theory states that wages will remain at the level needed for basic survival. If wages rise further, population increases; if they fall, population decreases. 2. The wage fund theory argues that wages are determined by the total amount allocated as wages and number of workers. Each worker receives an equal share. 3. The standard of living theory says wages are based on workers' standard of living, including necessities, education, and recreation. 4. The residual claimant theory holds that wages are what remains after distributing revenue to land, capital, and entrepreneurship based on their contributions.

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393 views12 pages

Subsistence Theory of Wages Explained

There are several theories that attempt to explain how wages are determined: 1. The subsistence theory states that wages will remain at the level needed for basic survival. If wages rise further, population increases; if they fall, population decreases. 2. The wage fund theory argues that wages are determined by the total amount allocated as wages and number of workers. Each worker receives an equal share. 3. The standard of living theory says wages are based on workers' standard of living, including necessities, education, and recreation. 4. The residual claimant theory holds that wages are what remains after distributing revenue to land, capital, and entrepreneurship based on their contributions.

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shaima
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Theories of Wages

Week 2
Lecture 2
Course: Compensation Management
Program: BBA 8th (HR specialization)
Theory 1. The Subsistence Theory of
Wages:
• The subsistence theory of wages, advanced by David Ricardo.
• The theory of population, developed by Malthus was also based on
this “iron law”.
• According to this theory, wages tend to remain at the subsistence
level.
• Wages paid to workers is just sufficient to fulfill their basic needs.
Cont..
• Workers don’t have surplus income. If wages rises above this level,
this leads to an increase in the population because the increased
prosperity of workers will encourage the workers to marry sooner and
increase population. This will increase labor supply.
• If the wages fall below the subsistence level, there will be fewer
wages and no prosperity.
Theory 2. Wage Fund Theory
• This theory is developed by classical economist named J.S Mill.
According to Mill, wage level is determined by wage fund and the
number of worker’s employed.
• To pay the laborer, a wage fund is raised.
• The wage fund is distributed among the worker’s employed. The
workers are assumed to be paid equal amount.
• If more workers are employed each worker gets fewer amounts and if
less number of workers is employed each worker gets more amount
of money.
Cont..
• The wage level is given by the ratio of wage fund and number of
worker’s employed. Mathematically,
Theory 3. Standard of Living Theory
• This theory is an improved and refined version of subsistence theory.
• According to this theory, wage is determined by the standard of living
of the workers.
• Standard of living refers to the bare necessaries of life and also
education, and recreation to which the worker is habituated.
Theory 4. Residual Claimant Theory

• Francis A. Walker (1840-97) Proposed this theory.


• According to this theory, four factors add value to the product which
is manufactured, these are land, capital, labour and entrepreneurship.
• The revenue earned by selling product was first distributed among the
three factors viz. land, capital, entrepreneurship as compensation
against their contribution.
• Whatever remained was paid to labour as wages against their value
addition. Thus labour is considered as a “residual claimant”.
Theory 5: Bargaining theory
• Under this theory, wages are determined by the relative bargaining
power of workers of their union and of employers.
• The bargaining theory of wages holds that wages, hours, and working
conditions are determined by the relative bargaining strength of the
parties to the agreement.
• The theory states that employers had greater bargaining strength
than employees. Employers were in a better position to unify their
opposition to employee demands, and employers were also able to
withstand.
Cont..
• The wages and other working conditions are determined by workers,
employers, and unions, who determine these conditions by
negotiation.
Theory 6: Behavioral Theory
• This theory states that wages are determined by such factors as . size
and prestige of the company, strength of the union, the employer’s
concern to maintain the workers, contribution by different kinds of
workers, etc.
Theory 7: Marginal productivity theory
• This theory is developed at the end of the 19th century by a number
of writers, including John Bates Clark and Philip Henry Wicksteed
• According to this theory, wages are based upon an entrepreneur’s
estimate of the value that will probably be produced by the last or
marginal workers.
• In other words, it assumes that wages depend upon the demand for,
and supply of, labour.
Cont..
• Consequently, workers are paid what they are economically worth.
The result is that the employers has larger share in profit as has not to
pay to the non- marginal workers.

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