Wage Theories and Reality
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Just Price Theory
Although most historical theories of wages are economic, the oldest is essentiallysociological. The
, adhered to in the Middle Ages, involved settingwages in accordance with the established status distribution. Wages weresystematically regulated to keep each class in its customary, and hence "right,"place in society. Higher-status persons got higher wages. This emphasis on tying of wages to status, and the preservation of customary relationships, althoughdeveloped in pre-industrial times, has a modern ring. These ideas are still commontoday. Employees and organizations are concerned with using correct comparisonsto assign "proper" relationships and maintain some hierarchical order of wages inthe organization. An example would be organizations' pay policies that call forsupervisors to be paid more than subordinates.
Classical Wage Theory
During the Industrial Revolution, market forces became dominant and laissez-faireprinciples were invoked to free market forces from custom and regulation. AdamSmith set the stage for what is now called
classical wage theory
by providing aplausible explanation of the relation between the price of goods and the amount of labor required to secure them. Although he did not develop a wage theory, hemade a number of observations pertinent to wages. His labor theory of value,which concluded that the full value of any commodity is the amount of labor it willbuy, may be considered a theory of labor demand. But his observations on wagedifferentials speak to today's wage issues. He suggested that people choose theemployment that yields the greatest net advantage. He proposed that there arefive characteristics used to differentiate jobs and thus net advantage: (1) hardship,(2) difficulty of learning the job, (3) stability of employment, (4) responsibility of the job, and (5) chance for success or failure in the work. He also identified twoquite different standards for comparing things of value: use value and marketvalue.
refers to the value anticipated from use of the item. It variesamong individuals and over time.
refers to the price something willbring. In a free market where demand and supply are equal, use value will equalmarket value.
It was Thomas R. Malthus's theory of population that provided the raw material forthe first economic wage theory. Population, according to the theory, is limited bythe means of subsistence: it increases geometrically whereas the means of subsistence increases arithmetically. David Ricardo translated Malthus's theory intothe
of wages. According to this theory, wages in the long runtend to equal the cost of reproducing labor, the subsistence of the laborer. Thistheory, often called the
iron law of wages
, indicated that little could be done toimprove the lot of the wage earner because increasing wages leads only toincreasing the number of workers beyond the means of subsistence.