32 WAGES

in to
'aving studied the general theory of distribution, position
we are now a

H take up the study of the determination of the share of the factors of production
separately. We shall first take up wages followed by rent, interest and profit.

Meaning of Wages
The term 'wages' means payments made for the services of labour. "A wage

may be defined," says Benham, "AS

a sum of money paid under contract by an

employer to a worker for

services rendered." A wage
payment is essentially a price
paid for a particular
commodity, viz., labour
services.

Is Laboura Commodity?
We have said that wage is do 00034
the price of labour as if labour
is a commodity. There is no

doubt that labour has peculiari-

ties of its own which differen
tiate it from other commodities
(see next page) and labour pro-
tests against its being described
as a commodity, yet it is true
that from the aspect with which 0uoo
the economist is concerned, 9909
labour is regarded as a com-

modity. Like a commodity it is

bought and sold. Labour par
ticipates in an exchange rela-
tionship, i.e., the worker gives ed
his time or labour and, in ex-

change, gets money including Money VWage.

some fringe benefits, if any.
354 Modern Economic Theory
or such extra work they are paid nothing. This
Nominal Wages vs. Real Wages ieans
that their real earnings are recduced to that exteut
Acconding to the classical wage thcory, labou
supply was considered a function of real wages, But (d) Regularity or Irregularity of Employmeat
according to Keynes, the workers acted irationally and Regular or more secure employiments may give lower
generally bargained tor noney wages aand they sharply oney wages, but the real wages may be higher than
Teacted aganst any cut in money wages. That is, a rise iregular and insecure employments which give high
n prices does not oftend labour so mch as a cut in money wages. For instance, a person with Rs. 10 daily
the money wage. The noney wage has also been called wage but whose employment IS ntermitent, may not
nominal wage. be so well off as another, who earns
regularly
Rs. 5a
The distinction between nominal wages and ral day. Hence, it is good to distinguish between ware
w.ages may be clearly understood. Nominal wages are rates and eanings.
wages paid or eceived in ternms of money. But money (e) Conditions of Work. Some occupations ane
wages alone may not give us a correct idea of what a lhealthier than others, and in some, the hours of work
worker really earns from his work. ln order to
ascer- are shorter than in others; the vork may be more
plea
tain real wages, which determine the standard of liv- ant or les pleasant: the employer may be more sym-
ing of a person, the following factors have to be taken pathetie or less, and so on. All these things should he
into consideration: taken into account in estimating a person's real earn-
(a) Purchasing Power of Money. When
con ings.
paring wages at different places and at different times
the changes in the purchasing power of money must )Future Prospects. A low money income will
be taken into account. The purchasing power of money be considered a high real wage if there are good pros
varies inversely with price level, i.e., pects of a rise in the future. On the other hand. a high
higher the price,
the lower the purchasing power of money, and vice initial salry may not be considered as good in the
versa. A part ofthe high wages in England and America
absence of prospects for a further rise.
may be due to higher prices prevailing in those coun-
tries. Three hundred rupees in a
village in India may Why a Separate Theory of Wages?
provide a much more comfortable lite than a similar
It is demand and supply relationship or
amount in a town or vice-versa, according to circum- searcu
in relation to demand, which explains all values
stances and tastes of the person concerned. One hun-
dred rupees in 1950 had much greater whether values of commodities or values of servies
purchasing of the factors of production.
power than in 1976. Even an increase ot money wages should we
Why then ha
thus leaves real wages at a lower level in 1976 as com-
a
separate theory of wages?
pared with 1950 The ordinary
theory of priees, i.e., denanu
It generally supposed that the Supply theory, is not fully applicable to the iete
is
prices rise faster
than money wages during the times of mination of wages for the following reasos
rising prices
and fall faster than noney wages during the periods of ) The demand for goods depends on ther
falling prices. The result is that money wages decline ity to the purchaser, whereas the demand for laba
in the forner and rise in the latter case.
utu
services depends on their productivity (and
(b) Subsidiary Farnings. In addition to the regu- ty) to the employer. Hence, denmand for
lar money wage, an
employee has extra eanings in needs a special ureatment.
tne
the form of money or
goods. For exanple, free board
and lodging are provIded to the domestiC (ü) The human element
servants and in the labour nu
may in some cases be given to peons. and the
additional income by markinE Cxamuation
Professors earn Serves
labour
special consideration. The abourer
the i

papers or services are

Inseparably tied up: hence
from tuition lees, and so on.
Subsidiary carnings nay portanee of the human
also arise from oppitunities of
employnent elemen
to other members of the
available ii) The peculiar institutional and behav
worker's family Forit
lictors atfect rket.
(c) Extra Work Without Extra bargains in the labour n w.ages

Payment. If an Stce, in the rural areas of

backward econo
employee is required to do exlra work without r e lixed
by custom
any
compensation, his real wages are less by that extent. instead
of competn distit

Peons are paid for doing their (iv) Certain which

duty during working peculiarities of labour,

hours, but quite often they are guish it from a
Iequired to work late. commodity, also necessitae
theory of wages. These peculiarities rc
 Wages 355

has weak bargaining power as against aged to marry and to have large families. The large
a) Labour
employer. Hence. the actual wage is less supply of labour brings wages down to the subsistence
theowerful orker may be entitled to by his produc- level. If wages fall below this level. marriages and
births are discouraged and undernourishment increases
vit the death-rate. Ultimately. labour supply is decreased.
Hence. the worker
b) Labour is most penshable. level. It is
untilwages rise again to the subsistenee
accept
a lowe wage than to what he may be
has to
staying power and must accept what
Supposed that the supply of labour infinitely elastic.
is
entitled. He has no
That is. its supply would increase if the price (i.e..
is oftered.
wage) offered rises.
in the price of labour react rather
c) The changes Criticism. In backward countries, wages no doubt
It amy be that when wages
curiously on its supply. are to be found at or near the subsistence level. But
the supply of labour may decrease in-
have gone up. to advanced countries Iike
unlike what happens in the case of
the theory does not apply
stead of increasing. and America. The theory evidently is based
may prefer leisure to work.
worker England
acommodity. The on the Malthusian Theory of Population. But it is
That is why supply
of labour may be a backward bend-
must inevi-
Wrong say that every increase in wages
to
ing curve.

tably be followed by an increase in birth rate. An in-

d) Another peculiarity is that the supply of labour crease in wages may be followed by a higher standard
cannot rapidly adjust itself to the changes in demand. of living which in turm influences the wage level.
It takes a generation to increase the supply of labour.
Ricardo, one of the exponents of the theory.
When. therefore, demand increases, wages must go
stressed the influence of custom and habit in deter-
Nor can the supply of labour be decreased when
up.
there is unemployment.
mining what was 'necessary' for the workers. But hab-
its and customs change over time. Hence. the theory
Conclusion. In view of the above peculiarities of can hold good for only a limited period of time and
labour, it becomes necessary to formulate a separate cannot be true of all times, especially of a world
theory of wages. All the same, it is well to remember
characterised by fast changing habits. Ricardo, there
thatwages being a price (of labour services). the fun- fore. admitted that wages might rise above the subsis-
damental principle of pricing, i.e., the interaction of
tence level 'for an indefinite period in an improving
the forces of demand and supply, applies to the wage
society.
detennination also. The various theories of wages only
dffer in the assumptions regarding the basic condi- Another criticism of the theory is that the subsis-
tions of demand and tence level is more or less uniform for all working
supply. classes with certain exceptions. The theory. thus, does
OLD THEORIES OF WAGES not explain differences of wages in different employ-
Subsistence Theory' ments.

Several theories have been put forward to explain Further, it may be said that the theory explains
e general level of wages prevalent in a country. Take wages only with reference to supply: the demand side
irSt the Subsistence Theory. This theory originated is entirely ignored. On the demand side, the employer
with the Physiocratic School of the French economists has to consider the amount of work which the em-
and was
developed by Adam Smith and the later econo- ployee give him and not the subsistence of the em-
sts of the classical school. The German economist ployee.
45salle called it the Iron Law of Wages or the Brazen Moreover, the fundannental weakness of the sub-
Law of Wages.
Karl Marx made it the basis of his sistence theory lies in its long-ternm character. It ex-
theory of exploitation.
plains the adjustment of wages over the lifetime of a
ACCording to this theory, wages tend to setle at generation and does not explain wage fluctuations from
the level to year. As such it has little practical value.
just sufficientto maintain the workerand his year
lanily at the minimum subsistence level. If wages rise Finally, the 'subsistence minimum' is a very
above the
subsistence leve the workers are encour-
vague term. Does it refer to the minimum requirements
of a modern man or of a tribal savage? There is no
.
See Dobb, M.- Wage: 1932, Ch. IV, Sec. 3, p. 100. rigidly fixed minimum and it is not independent of the
wages ruling over a period of time.
356 Modern Economic Theory
Wages Fund Theory' capital or the present products, has
This theory is associated with the name of J.S. a keen
controversy in the past. The been
oeen the t

thatsuhyeut
Mill. "Wages." wrote Mill, 'depend upon the demand cases, where the fact is
process of q

productiveproduction
and final stages of the is in sum
supply of about, or, as it is often expressed, on the process, short
proportion between population and capital. By popu- out of the
Ocess of
present production. On the wages are ea.prad
wa

other
lation is here meant the number
only of the labouring production is long, the labourer
classes or rather of those who work for hire, and
by
does not obtain wages from the
capital, only circulating capital and not even the whole either directly product of hi
through exchange. InIn such
or
caes
of that but the
part which is expanded on the direct wages mainly come out of
capital.
purchase of labour." Mill asserted: "Wages not only Mill
depend upon the relative amount of capital and popu-
argued that wages were paid out
fixed proportion of capital set aside for of ae
lation. but cannot. under the rule of this n
affected by anything else."
competition, be This also is not true. There is
no fixec purpose
this sense. The fund, if we can at wages
all call it so fund in
According to this theory, therefore, wages de- tic. Its volume changes isal
1s elkg
according to the
prosperte
pended upon two quantities, viz.. (i) the wage fund or
profits. The productivity of labour at a cts
the circulating capital an
important factor in given time
set aside for the
labour and (ii) the number of labourers
purchase of determining these prospects
seeking em- Further, the theory is a mere
ployment. Hence, the level of wages can be ascertained tell us about the sources of the truism. It does na
by means of a simple arithmetical
operation by di- method by which it is estimated. Itwages fund and the
viding the wages fund by the number of workers. In is self-evident, namely, that the simply tells us wha
other words,
tained by dividing the wages fundwage
can be ascer
wages vary directly as the quantity of
capital and inversely as the number of by the number of
workers. Workers.
Wages. thus, cannot rise unless either the wage Again, the
fund increases or the number of theory assumes a
degree of antago
workers decreases. nism between labour and
But since the
theory takes the wage fund as fixed wages capital that does not actually
exist. According to this
could rise only by a reduction in the theory, wages can increase only
number of work at the
expense of profits. But this is not necesarily
ers. sa
In times of business
It would its can
prosperity, both wages and prok
appear, therefore, that according to this go up.
theory, the efforts of trade unions to raise It is also
futile. If they succeeded in wages are wrong to assume that the forcing upt
it can only be at the
raising wages in one trade, the wages will drive capital abroad. Capital is not so
of
expense another, since the wage sensitive, not are the
fund fixed and the trade unions have no
is profits so inelastic. Ihe tme
control over Tails to show
why wages cannot be increaseu a
population. According to this theory therefore, trade of rent and
unions cannot raise wages for the expense profit.
labour class as a
whole. We cannot
accept its corollary that the
unions are powerless to increase wages and e any
r
Criticism. In contrast to the
subsistence theory, measures which hindered the
which represented rigid a view and
accumulation 0
videdeter1ninistic long-term attempted topro- e.8, heavy taxation, were bound to lower
or static
fund theory tried to theory, the wages reducing the wages fund. The theory is too nsyn
explain movement of wages in a thetic to labour when it says that "the onuyhope
changing world. Instead of a
single equilibrium to
which wages must mprovement for the workers lay in limitngu
inevitably return, determined
production of labour, the wages fund by
cost of of their own
families and helping to lne
provided a varying 'natural rate, determined theory perity of their masters" (Dobb).
ing ratio of capital to by vary-
population. It is difficult to subscribe to the implicnn
The theory
has been widely ne theory, viz., that if any section of libou
rejected criticized and stands
Mill himself recanted
now. Digher wage, it will be at the expense ot
other

it in the
edition of his
"Principles
of Political second WIho must receive less or face unenipi
Mill thought that wages were paid out
Economy" looks absurd that low wages paid to a cert
of workers would benefit others for it left lk larger
lating capital alone. Whether the source of of cireu- fund available for them.
wages is Economy
u

2. Lbid. Ch. IV. Sec. 6. See also The

of

Appendix (a). Marshall's Principles. theory ignores the principi ou

would
High-Wages. We know that arise in 7se
wages

prove labour effriciency anddincreisc the

dem
 Wages 357

lahour to satisty which the employers would set aside utilise in the purchase of labour. This view is repre-
for the purchase of labour. That is why
a larger fund sented by the marginal productivity theory.
the economists regard
capital not as a fund but a flow While discussing the general theory of distribu-
Moreover. the wages fund theory does not ex- tion (Chapter 31), we have given a detailed account of
differ in different occupations. Be- the marginal productivity theory and its criticism. There
plain why wages
sides. the wage rates prevalent different countries
in we explained the theory states that, under conditions
to the total amount of
capital avail- worker of skill and
donot coespond of perfect competition, every same

able there. In new countries capital is scarce but the efficieney in a given category will receive a wage equal
are high: the opPposite
is the case in the old coun- to the value of the marginal product of that type of
wages
tries. labour
Conclusion. In spite of the above criticism, it may We may repeat that the marginal product of labour
in any industry is the amount by which the output
be stated that the theory contains an element of truth.
t may not apply to a highly industrialised country, would be increased if a unit of labour was increased,
from while the quantities of other factors of production
but, in an under-developed country suffering
be increased unless employed in the remained constant. In short,
industry
capital deficiency, wages cannot
accumulated it is the output attributable to a single unit of labour
national income is increased and capital
unaccompanied by any change in other factors of pro-
through industrialisation.
duction. The value of the marginal product of labour
Residual Claimant Theory is the price at which the marginal product can be sold
in the market.
The Residual Claimant Theory has been advanced
to him. Under conditions of perfect competition, an em-
by the American economist, Walker. According
wage are the residue left over,
after the other factors ployer will go on employing workers until the value
of the product of the last worker he employs is equal1
of production have been paid. Walker says that rent
is or additional cost of employing
the
and interest are governed by contracts but profit to the marginal
determined by definite principles. There are no simi-
last worker. Further, the condition of perfect competi-
lar principles. says the theory, operating as regards tion implies that the marginal cost of labour is always
of the number of
Wages. According to this theory, after rent,
interest and
equal to the wage rate, irrespective
the remainder of the total out- workers the employer may engage. Every industry
proli have been paid,
law of diminishing re-
put goes to the workers as wages. being ultimately subject to the
must start declining sooner
turns, this marginal product
admits the possibility of increase in
The theory or later. Wages remaining
constant, the employer stops
labour. In this
Wages through greater efficiency of workers at that point where value of the
ense, it is an optimistic theory, whereas the subsis employing
marginal product of a worker is equal to the wage rate.
ence theory and the wages fund theory are pessimis-
IC. So far have assumed that the quantities of other
we

remain constant while that of

labour alone in-
rejected factors
Criticism. This theory also has been This, however, is not true
because quantities
defects. In the first creases.
host economists. I has several able to of factors increase all
round though this may not be
Place, it does explain how trade unions are
short-run. To allow for this fact, the
not econo-
true in the
1 Wages. Secondly, it ignores the influence of supP term "marginal net product
of
mists make use of the
Of labour on wages. Thirdly, one fails to under of labour." The
demand, thal labour" instead of "marginal product
Why the same laws of supply and value of a marginal net product of labour may be de-
of
a n the remuneration of other factors produc it 1s fined as the
being value of the amount by which out-
be applied 1o wages as well. Finally,
Cannot would be increased by employing
one worker
nnore
n e worker who is the residual claimant but ine put other factors of pro-
addition of
the other factors with the appropriate
who undertakes other fac-
Cpreneur, addition to the cost of the
to pay
duction, less the
O production before he can expect to get anyhing the quantities of other factors.
tors caused by increasing
be re-stated as fol-
Marginal Productivity Theory of Wages The theorymay thus finally
in the
C conditions of pertect competition
TOwards the end of the nineteenth century, lows : Under
in the market for the products of
cconomists abandoned the Wage-Fund doctrine. labour market and
the number employed,
the industry, and irrespective of
labour for
momists like Marshal treated demand
to the value of
a wage equal
as derived from the demand for the products of labour every
worker will receive
labour.
of his
r o m a pre-determined decision of the emplOy- marginal net product
Us Tegarding the amount of capital they proposcu to
358 Modern Economic Theory
Limitations of the Marginal Productivity efficient management, These lactors are
Theory. We have already studied in detail the various control of workers. outside the
limitations and eniticisms of the Marginal Productiv- Fifthly, it should be borne in mind
that
ityTheory as a general principle of distribution. ' With ginal net product ot labour depends not merelyt C mar
reference to its application to wages, we may repeat
supply of labour but also on the supply of all th
that the theory is true only under certain assumptions of
such as perfect competition perfect mobility of labour
factors production.
If other lactors are
plentiful nd
labour relatively scarce, the marginal net
product of
from employment to employment, homogeneous
char labour will be high, and vice-versa.
acter of all labour, constant rates of interest and rent
and given prices of the product. Finally, productivity is also a
function of wage
It statie The actual world is dynamic
Low productivity may be the cause of low wae
is a theory. which may tell on the efficiency of the worker,
All the factors assumed to be constant are in fact con-
his standard of living and ultimately check the
lower
stantly changing. Competition is never perfect; mo- of labour. The
supply
bility of labour is restricted for various reasons; all
theory takes the
supply of labour for
granted.
labour is not of the same grade: remuneration to other
1actors of production doesn't remain constant; and the Conclusion. In short, the marginal productivity
prices of the products of labour vary. All these changes theory ignores the effect of wage changes on the sup.
modify the theory when applied to actual conditions. ply of labour, bargaining strength and monopoly con
The theory, however, as an assertion of a tendeney, is ditions, etc.
true and is valuable in understanding the basie forces Rejecting the marginal productivity theory
that determine wage rates. Marshall said: "This doctrine has been put forwand
In the real world, owing to the absence of the a theory of wages. But there is no valid ground for any
above assumptions, there is no single rate of wages such pretension... Demand and supply exert eqully
that may be applicable to all labour of a particular type. important influences on wages; neither has a claimo
Wages differ from place to place, from person to per- predominance; any more than has either blade of a
son and from employment to employment. scissors, or either pier of an arch.... (but) thedoe
trine throws into clear light one of the causes that gow
The following further points of criticism may now
erns wages."4
be noted
Firstly, the theory has little applicability to real-
Taussig's Theory of Wages
ity. Labour is not perfectly mobile. Workers ofthe same The American economist Taussig gives amod
skill and efficiency may not receive the same wages at Iied version of the Marginal Productivity Theory
two different places. Wages. According to him, wages represent the u

Secondly, though the condition of a large num- ginal discounted product of labour.
ber of independent buyers of labour is fulfilled for a
Taussig thinks that the labourer cannot gee
few industries of all countries and for most industries CaUse
uil amount of the marginal output. This is e
of some countries, the employers usually combine to lubur

the disadvantage of the worker. It is a case of monop-

production takes time and the final product o
Cannot be obtained immediately. But the labou y the
sony, i.e., one buyer and many sellers. The employers
O be supported in the meantime. This is donepay the
succeed in pulling down the wages below the value of
capitalist employer. The employer does ne
the marginal net product of labour. If enmployees are
also collectively organised, the wage rates may or ull amount of the expected marginal prouu final u
may
not be cqual to the values of marginal net product of He deducts a certain perce from the o
the isk
labour in the occupations or industries concerned. The n order
to compensate himself for deduetio
wages are determined by the relative bargaining making an advance paynent. This ntents

strength of the two parties, but cannot exceed the value g to Taussig, is made at the current rae
lubut
of
of the marginal net product of labour. product te

Thus, wages equal the total

mus

lirn
Thirdly, the market for goods is in general the marginal land or in the marginat

characterised by imperlect competition, this also un- umount discounted explained above. Ine il
nting
seltles the theory. 01 product is ascertained
the by discou
Fourthly, the productivity of wWorkers is also de- pated future returns.
538
t h et h e o n

pendent on factors such as the quality of capital and 518,

4.Marshall A., Principles, Pp.
consult Readun
3. See Chapter 31. For a detailed study
of Income Dis1ribution. pp. 7d
 Wages 359
Two weaknesses of the theory have been or small), we have also to consider its elasticity or
Taussig himself. First, that it is "a dim
recognisedby responsiveness to change in wages. The elasticity of
one. remote irom the problem of real life" demand for labour depends on the elasticity of demand
and abstract
Ta this he replies that this weakness is common to all for its output. Also, demand for labour will generally
conomic generalisatio Second, and a more seri be inelastic if their wages form only a small proportion
is that the joint product is discounted at of the total wages. The demand, on the other hand,
Qus, objection
current rate
of,interest. But according to his own will be elastic if the demand for the commodity it
the
analysis. the rate of interest is a result of the process produces, is elastic if substitutes are
or cheaper
labourers, because it depends on the available.
of advance to the
excess of what the labourers produce in the future over The demand for labour also depends on the prices
to them in the present. This would
what is advanced and the quantities of the co-operating factors. Sup-
in a circle. To meet this difficulty Taussig
mean arguing pose, the machines are costly, as is the case in India,
determine the rate of interest inde-
suggests that we obviously more labour will be employed. The demand
pendently of marginal productivity by the rate of time for labour will be more. Also, the greater the demand
dis-
preference, and with the interest thus determined for the co-operating factors the greater will be the de-
of labour. This, however
count the marginal product mand for labour.

hardly solves the difficulty; it merely evades it. Another factor that influences the demand for
labour is the technical progress. In some cases, labour
Taussig's theory ultimately analysed is another For
version of the Residual Claimant Theory of Wages. and machinery are used in definite proportions.
He says, in fact, that wages are what
is left after rent, instance, the introduction of automatic looms reduces
interest and profits are deducted from the total output. the demand for labour.
As such. the theory is open to all the objections put Thus, demand for labour is determined by (a) the
forw ard against the Residual Claimant Theory. nature of demand for the product of labour, (b) the
total cost of the
proportion of the cost of labour to the
MODERN THEORY OF WAGES product, (c) its substitutability by other factors, and
and can- (d) supply of capital as determined by the ability and
Although labour has certain peculiarities invest.
not be regarded as an ordinary commodity, still wages willingness of investors to save and
interaction of the de-
are very largely determined by the After considering all relevant factors, e.g.,
the prices
forces of demand and supply as in the case of an
ordi-
mand for the products, technical conditions,
Thus, the Modern theory of wages
is
of the co-operating factors, etc., the employer is gov-
nary commodity.
erned by one fundamental factor, viz., marginal pro-
the demand and supply theory.
ductivity. The demand for labour,
under typical cir-
comes from the
Demand for Labour cumstances of a modern community
fim is labour and other factors of
"The demand for labour by the individual employer, who employees
out of his business. The
a function of both the productivity of labour
and the production for making profits
therefore is the wage that an
other words, demand price of labour,
money demand for the firm's product."° In to pay for that particular kind of
demand for labour reflects partly labour's produc- employer is willing
ne at
and partly the market value of the product labour
vity labourers one by
different levels of production. Suppose, the employer employs
the law of diminishing marginal
one. After a point,
It
The demand for labour is a derived demand.
it helps returns will come
into operation. Every additional
derived from the demand for the commodities
produce. Greater the consumer demand for the prod- labour employed will add to the total net production
rate. The employer
will naturally stop
CL, the greater the producer demand for the labour at diminishing
labourers at
additional
the point at which
Cuired in making it. It may be observed that it 1s
employing
Apected demand and not existing demand for the prod- the cost of employing
a labourer just equals (in fact it
to the value
addition made by him
Ct that determines demand for labour. Hence, an ex- is little less than) the
wil the total net product.
in the demand for a commodity
PECted increase of to such a labour
that that he will pay
ncrease the demand for the type of labour Thus, the wages to the value
productes this commodity. unit of labour) will be equal
(the marginal
or marginal productivity. But
Apart from the magnitude of demand
(i.e., big of this additional product
units are supposed
to be homoge
since all he labour will be paid
worker
Allen M. Carter. 7The Theory of Wages and Enploy- neous, what is paid to the marginal
labourers.
ment. 1959. p. 45. to all the
360 Modern Economic Theory
The demand schedule of the employer for labour of labour may mean three
hike the demand schedule of the consumer for a com-
things: (a) Supply of
1s to fim, (b) Supply of labour to the labe
modity. i.e., lower the wage, the larger the number of Supply of labour to the entire economy
industr
industry and te)
workers demanded. With the larger labour force, out-
To a given fim, the
put will expand and each unit of output will have to be supply labour is per of
elastic because at the current wage
rate. it o ly
sold at a lower price. This is an additional reason why ca
ny workers as it wants. ts
own engage
demand con
marginal productivity of industry whole declines.
as a
the other reason being a decline in the marginal out-
tutes only a negligible fraction of the total onsti.
labour. upply of
put.
But for the industry as a whole
the
The change
in wage rate determines the diree-
labour is not infinitely elastic. Hence, if it of supply
tion of change in the demand for labour but the de- labour it has to attract it from other
wants more
gree of this change depends on the elasticity of de- fering a higher wage. It can also
industries by of.
work the
labour force overtime. This in effect will meanexistino
mand for labour. In case of elastic demand, a small
change in the wage rate will lead to a considerable an
crease in supply. The supply of labour for
change in demand for labour, and vice-versa. Whether the indug
is subject to the law of supply, vZ.,
the demand for labour is elastic or not will depend on supply varies d
rectly with price, which means low wage small supple
(a) the technical conditions of production and (b) elas- and high wage large supply. Hence, the
ticity of demand for the commodity which that labour supply cunve
of labour for an industry rises upwards from left
produces. Generally, the short-term demand for labour to the

is less elastic that the long-term demand. That is why

right.
the employers and the trade unions adopt a stiff atti- The long-run supply curve of labour in
any oc.
tude in wage negotiations. cupation is a horizontal straight line, if earnings in

In fact, for any particular employer, working un-

other occupations are constant. This is due to the mo
bility of labour among occupations. Even in the shot
der perfect competition, wages are already settled by
run, it will be approximately horizontal if the
the market forces. Each firm constitutes so small a occup
tion is an old one and does not require much training
portion of the entire industry that it cannot influence
In case an occupation requires extensive training.the
wages appreciably by employing more or less of labour.
short-run supply curve will be inelastic.
The supply curve of labour confronting each producer
is perfectly elastic, i.e., horizontal line at the level of The supply of labour for the entire economyd&
the market wage rate. The individual demand curve is pends on economic, social and political factors or ir
determined by marginal productivity. The individual stitutional factors, e.g., attitude of women towan
employer hires as many labourers as will equate the work, working age, school and college age and posse
marginal productivity of labour with the rate of wages bilities of part-time employment for students, sie and
in the market. composition of the population and sex distrbul
attitude to marriage, the size of the family, birth cu
In Chapter 31, we have given two diagrams. Have e.
rol, standard of medical aid and sanitation,
a look at them again. Fig. 31.5 (a) shows the demand
for labour of an individual firm and Fig. 31.5 (b) the A given supply of labour, under conditois
demand of the industry. It is necessary to remember pertect competition, gets distributed in variOu
that it is the demand of the entire industry, not of an ployments in such a way as to make the marga
individual firm, which determines wages in the mar- ductivity of labour in all the employmenls enploy
ket. The individual firm has to accept the market rate but if labour cannot move freely from one
w
of wages and adjust its own demand for labour ac- ment to another, the marginal productivity eyuenth.

cordingly. The demand curve of the industry is de ferent in different employments, and cinde
siule
rived from the lateral summation of the demand curve Wilges will also be different even for the
of individual firms. labour.
decreas
be
Supply of Labour The supply of labour may happens

abourers refusing to work for a time. 1a The

The supply of labour inions.

depends on (a) the number into trade

uni
theen
of workers of
when labour is ganised
a given type of labour which would of- offered by
fer themselves for employment at various wage rates labourers may not accept wages
the mainlen
ensure

and (b) the number of hours per day or the number of ployer, if such wages do n o t accusto
igherWagesane are

of a standard of living to w h i c h they

days per week they are prepared to work. The Supply But, as we shall see, it is only when E