32 WAGES

are now in a position to take un ths

distribution, we
aving studied the general theory of studyyof te
H un
We shall first take
ke
determination of the share of the factors of production separately. up wages follow
by rent, interest and profit.

Meaning of Wages
lor the services of labour. A Wage may be defino
The term 'wages' means payments made
Benham, "As a sum of money paid under contract by an employer to a worker for services rendered"A

labour services.
Awag
payment is essentially a price paid for a particular commodity, viz.,

Is Laboura Commodity?
We have said that wage is the price of labour as
if labour is a commodity. There is no doubt that labour
has peculiarities of its own which differentiate 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 the economist
is concerned, labour is regarded as a commodity. Like
a commodity it is bought and sold. Labour partici-
pates in an exchange relationship., i.e.. the worker gives
his time or labour and, in exchange. gets money in-
0000
cluding some fringe benefits, if any.

Nominal Wages vs. Real Wages

According to the classical wage theory. labour
supply was considered a function of real wages. But
according to Keynes, the workers acted irrationally
and generally bargained for money wages and they
sharply reacted against any cut in money wages. That
is, a rise in prices does not offend labour so much as a
cut in the money wage. The money wage has also been
called nominal wage.

The distinction between nominal wages and real

wages may be clearly undersiood. Nominal wages are
wages paid or received in terms of money. But money
wages alone may not give us a correct idea of what a Money Wage

354
 Wages 355

Cns
lrom
rom his work. In orcder to ascer leasant ow less pleasant, the employer may be more
determine the standard of liy yinpatlhetic or less, and so on. All these things sloula
rully

which
r ctors have
tollowing lacte to be taken be taken into accomt in estimatin eal
7s),th
a
pers' e
ngs
of Money, hen
ehasing Power and at dilferenm
Fulure P'rospects A low noncy ione
'ur different places
Will be comsiered a high real wage if there are pood
poovCr of money
1 g e s

in the purehasing
count. The purchasing power of prspects ol a rise in the lutue. On the other hand, a
a k e nm o c c o u n

' s mvCIsely
with price level. i.e.,
o fhigher
"e high initial salany ay not be considered as g0d in
the purchasing power ol money, Ihe absence of prospects for a lurther rise.
Hao.

AA part part oft the high wages in England

higher prices prevailingin Why a Separate Theory of Wages?
C T .

o h i o

bed
f 1 may
lAumeru'ca
Th hundred rupees in a village in It is demand and supply relationship or searcity
cntis.
much more comtortable life than in relation to demand, which explains all values
Ne anvide a

mQunt in a town or VCe-Versa,

VICe
according to whether values of commodities or values of servICes
and tastes of the person concerned. One of the factors of production. Wlhy should we then have
tastee

n CS
and
USta it 1950
1950 had
had much greater purchasng a separate theory of wages?
yA rupees m
Mined 976. Even an inerease of money wages
1976
than in The ordinary theory ol prices, i.e., demand and
ner real wages at a lower level in 1976 as con-
uhes
leave's Supply theory, is not fully applicable to the
puredwlh 1950 determination of wages for the following reasons :

generally supposed
that the prices rise faster (i) The demand for goods depends on their utility
Itis
during the times of rising prices
money wages to the purchaser, whereas the demand for labour
during the periods of
fall faster than moneyiswages
that decline
services depends on their productivity (and not utility)
rices. The result money wages
alling
to the employer. Hence, demand for the labour needs
and rise in the latter case.
former
n the a special treatment.
Earnings, In addition to the
b) Subsidiary i) The human element in the labour market
an employee has extra earnings
ularmoney wage, deserves special consideration. The labourer and the
or goOds. For example, free board
inthe form of money labour services are inseparably tied up; hence the
are provided to the
domestic servants and
nd lodging
may in
some cases be given
to peons. Professors earn importance of the human element.
examination papers or and behavioural
aditional income by marking (il) The peculiar institutional
so on. Subsidary earnings may in the labour market. For
from tuition tees, and factors afect bargains
from opportunities of employment available in the rural of backward economies,
aso arise instance, areas
1o other members of the worker's family. wages are fixed by custom instead of competition.
Extra Pay-
(o) Extra Work Without (iv) Certainpeculiarities of labour, which
do extra work
ment. If an employee is required distinguish it from a commodity, also necessitate a
to

wthout any compensation, his real wages are less by

separate thecory of wages. These peculiarities
are:
that extent. Peons are paid for doing their duty during
(a) Labour has weak bargaining power as against
Working hours, but quite often they required to are

wOrk late. For such extra work they are paid nothing. the powerful employer. Hence, the actual wage is less
is means that their real earnings are reduced to that than what a worker may be entitled to by his

exlent. productivity.
(d) Regularity or Irregularity of Em- (b) Labour is most perishable. Hence, the worker
has to accept lower wage than to what he may be
a
pioyment. Regular or more secure employments
entitled. He has no staying power and must accept what
may give lower money wages, but the real wages may
higher than irregular and insecure employments is offered.
Ich give high money wages. For instance, a person (c) The changes in the price of labour react rather

Rs. 10 daily wage but whose employment is m- its supply. It amy be that when wages
euriously on
tent, may not be so well off as another, who earms the supply of labour may deerease
have gone up,
iarily Rs. 5 a day. Hence, it is good to distinguish
EWeen wage rates and instead of increasing, unlike what happens in the case

earnings. a commodity.
The worker may prefer leisure to work.
of
Conditions of Work. Some occupations That is why supply of labour may
be a backward
are healthier than others, and in some, the hours of
bending curve.
ork are shorter than in others: the work may be more
 356 Modern Economic Theory
Another peculianty is that the supply of labour habits and customs change over
me
cann rapidly adjust itself the changes in demand.
can hold good for only a limited Hen the t
i takes
to
increase the supply of
cannot be true of al1 CS. per o
a generation to
When. therefore. demand increases, wages must go
up Nor can the supply of labour be decreased when
labour characterised by fast especalhabitsly of worandtla
therefore, admitted that changing
wages abits
lume
a

there is unemployment. subsistence level for might

an se above, the
indefinite
helusion. In view of the above peculiar1- improving socicty. period in
an
es of labour, it becomes
necessary to fomulate a sepa Another criticism ot the
rate theory of wages. All the same. it is well to remem- theory
subsistence level is more or less uniforIs tha
er that wages being a price (of labour services). the classes with certain exCeptions. The the
fundamental principle of pricing. i.e. the interaction not explain differences theomork okng
of the forces of demand and
thus,
wages in differendoe
supply. applies to the wage employments.
determination also. The various theories of wages only erent
differ in the assumptions regarding the basic condi-
Further, it may be said that
the theorm
wages only with reference to
supply;
the
emandexplams
tions of demand and supply.
is entirely ignored. On the demand
has to consider the amOunt of work side, the. em sioe
OLD THEORIES OF WAGES which the oye
give him and not the subsistence of
emplothe mployee
Subsistence Theory' Moreover, the!fundamental weakness
subsistence theory lies in its long-term
of
Several theories have been put forward to
the general level of
explain
wages prevalent in a country. Take
explains the adjustment of wages over thecharae
lifetinime of
first the Subsistence
Theory. This theory originated generation and does not explain wage fluct
with the Physiocratic School of the French economists from year to year. As such it has little sations
and was
practical value.
developed by Adam Smith and the later Finally, 'subsistence
the minimum' is a very vapu
economists of the classical school. The German term. Does it refer to the minimum
economist Lassalle called it the Iron Law of modern man or of a tribal
requirements
the Brazen Law of
Wages or savage? There is no riidl
Wages. Karl Marx made it the basis fixed minimum and itis not independent
of his theory of
exploitation. ruling over a period of time. of the wages
According to this theory, wages tend to settle
the level just sufficient to maintain the worker and his atWages Fund Theory'.
family at the minimum subsistence level. If wages rise This theory is associated with the
name of JS.
above the subsistence level, the workers are Mill. "Wages." wrote Mill,
encouraged 'depend
and supply of about, or, as it is often
upon the demand
to
marry and to have large families. The large supply expressed, on the
of labour brings
wages down to the subsistence level. proportion between population and By capital.
If wages fall below this
level, marriages and births are population is here meant the number only of the
discouraged and undermourishment increases the death- labouring classes or rather of those who work for hire,
and by capital, only
rate.
Ultimately, Jabour supply is decreased, until wages circulating capital and not even
the whole of that but the
rise again to the subsistence level. It is part which is expanded on
the supply of labour is supposed that the direct purchase of labour." Mill
infinitely elastic. That is, its asserted: "Wages
supply would increase if the not only depend
price
(i.e., wage) offered upon the relative amount of capal
rises. and population, but cannot, under the rule of
competition, be affected by anything else."
Criticism. In backward countries, wages no
doubt are to be found at or near the According to this theory, theretfore, wage
But the
subsistence level.
theory does not apply to advanced
countries pended upon two quantities, viz., (i) the wage un
like England and America. The or the
based on the Malthusian theory evidently is circulating capital set aside for the purcnasc
Theory of Population. But it labour and (ii) the number of labourers
is wrong to say that sec
every increase in wages must Cmployment. Hence, the level of wages cane
inevitably be followed by an increase in birth rate. An NCertaned by means of a simple arithmeticalopenl
increase in wages may be followed a
of living which in turn influences
by higher standard y dviding the wages fund by the number ofworkc
m other words, wages vary directly as the y of
the wage level.
Ricardo, one of the exponents of the Capital andinversely as the number of workets
stressed the influence of custom and theory,
habit in Wages, thus, cannot rise unless either the wage
determining what was 'necessary' for the workers. But Tund increases or
the number of workers u
C r e a s e s .

1. See Dobb, M.- 2. Ibid. Ch. IV. Sec. 6. See also Marshall's rinciples
Wages, 1932, Ch. IV, Sec. 3, p. 100.
Appendix (a).
 Wages 357
v takes the wage lund as fixed wages
take

tneory
Taiis to show
yne
the
by a reduction in the number of orkers. why wages cannot be increased at ho
u
r
whinseon expense of rent and
profit.
near, theretore. that according to this
HOuld. We cannot
efforts of trade unions to raise
wages are unions are
accept its corollary that the trade
I f
theysucceede sicceeded in raising wages in onetrade powerless to increase
wages and that any
the cxpense of another, since the wage measures which hindered the
the
C8..
accumulation of capla
O/y
be
at

the trade unions have no control over heavy taxation, were bound to lower wages oy
a1 TCaucing the wages fund. The theory is too
rding to this theory therefore, trade
,

unsympathetic to labour when it says that "the oniy

raise wages for the labour class as
a
hope of
the size of
improvement for the workers lay in limiing
their own families and helping to increase
m. In contrast to the subsistence theory, the
r i t i e i s m .

prosperity of their masters" (Dobb).

wheth r e p r e s e n
resented a rigid-view and attempted to It is difficult to subscribe to the implication of
terministic long-term or statie theory, the the
eory tried to explain movement of wages
theory, viz., that if any section of labour wrested a
higher wage, it will be at the expense of other workers
World. Instead of a single equilibrium who must receive less or face unemployment. It also
wages must vitably return, determined by
changin,

looks absurd that low

ofproduction (of labour,' the wages fund
wages paid to a certain secuon
theory of workers would
benefit others for it left larger wages
. a varying 'natural rate, determined by fund available for them.
to population.
povided.

atio of capital The theory ignores the principle of Economy of

The theory
hasbeen widely criticized and stands High-Wages. We know that a rise in wages would
now. Mill himself recanted it in the second improve labour efficiency and increase the demand for
yatedu
Prineiples of litical Economy" labour to satisfy which the employers would set aside
adtono f
of his
Mill thought that wages were paid out of
a
larger fund for the purchase of labour. That is why
the economists regard capital not as a fund but a flow.
capitalalone.
CTnculating a Whether the source of wages
aital or the present products, has been the subject Moreover, the wages fund theory does not explain
controversy in the past. The fact is that in why wages differ in different occupations. Besides, the
fa keen
where the process of production is short wage rates prevalent in different countries donot
ame cases,
of the productive process, wages are corTespond to the total amount of capital available
o final stages
production. On the other hand, there. In new countries capital is scarce but the wages
nuid out of the present
are high; the opposite is the case in the old countries.
shen a process production long, the labourer
of is

not obtain wages from the product of

dhviously does
His labour either directly
or through exchange. In such
Cases, wages mainly come out of capital.
Mill argued that wages were paid out of a certain
fixed proportion of capital set aside for this purpose.
This also is not true. There is no fixed wages fund in
his sense. The fund, if we can at all call it so, is elastic.
is volume changes according to the prospects of
profits. The productivity of labour at a given time is
a impontant factor in determining these prospects.
Further, the theory is a mere truism. It does not
ell us about the sources of the wages fund and the
Tiethod by which it is estimated. It simply tells us what
l1-evident, namely, that the wage can be ascertained
y aviding the wages fund by the number of workers.
Again, the theory assumes a degree of antagonism
Mcn labour and capital that does not actually exist.
rding to this theory, wages can increase only at
Lpense of profits. But this is not necessarily so.
nes of business prosperity, both wages and profILs
Can go up.
up oI
aso wrong to assume that the forcing
e s will drive capital abroad. Capital is not so
ensitive, are the profits so inelastic. The theory
Conclusion. In spite of the above criticism, it
may be stated that the theory contains an element of
truth. It may not apply to a highly industrialised
country, but, in an under-developed country suffering
from capital deficiency, wages cannot be increased
unless national income is increased and capital
accumulated through industrialisation.
Residual Claimant Theory
The Residual Claimant Theory has been advanced
by the American economist, Walker. According to him,
wage are the residue left over, after the other factors
of production have been paid. Walker says that rent
and interest are governed by contracts but profit is
determined by definite principles. There are no similar
principles, says the theory, operating as regards wages
According to this theory, after rent, interest and profit
have been paid, the remainder of the total output goes
to the workers as wages.
The theory admits the possibility of increase in
of labour. In this
wages through greater efficiency
it is optimistic theory,
an whereas the subsis-
sense,
tence theory and the wages fund theory are pessimis-
tic.
 358 Modern Economic Theory
So lar we have assumed
Criticism. Ihi them alo has een tha the
other lacts C n onstant
l w
fed by t eromomits I has several lelects whvle qa
f plau, t hes not plam hon Ide ui}s alone meeaes
(Juanitics ol lactors
This,
Iowever. that of
CICase all I no
able raie ages Sovondly, il ignoes he
tuc f supply ol labn on wapes. Thndly. o
n o l he uc n the shom Tu nd
allo
hAph thihi s
a o understand why the same laws of suply an
c t . the cconomists make use of the
lc
nct produ t of labour" instead of em a pIna
emand, eylan the emuneration of other
that
of prahucton vanno he applhed o wages as wel
labour" The value of a
marginal ne
wal prol
abor may be detined as being
inally t s nt the worker who is the esidualclan Ihe
amont by which outpiul would he i alue
ant but the entrepreneur, who undertakes to pay the

the fax toN of praduction before he can expect to

ployinp one morc worker with the
tion of other lactors of
NCeaed hy etmhe
approp wvate add
getanythng to the cost of the other lactors ca
producton. less the a
the quantities of other factors.
Marginal Productivity Theory of Wages
The theory may thus inally be
Towands the end of the neteenth century, the re-
lows: Under conditions of pertect competia. loj
economists abandoned the Wage-Fund doctine.
labour market and in the market tiuon in the
bcomomists like Marshall treated demand for labour the
the industry, and irrespective of the number
for product f
as derived from the demand for the products of labour
and not trom a pre dietermined decision of the em- ery worker will receive a
wage equal to the uoyesl
ployers eganding the amount of capital they proposed
of marginal net product of his
labour Value
to ulse in the purehase of labour. This view is rep- Limitations of the
Marginal Pr
resented by the marginal productivity theory. tivity Theory. We have
already studied inoduc.
do
While discussing the general theory of distribu-
the various limitations and riticisms of the Margin
tion (Chapter 31), we have given a detailed account Productivity Theory as a
general principle of
of the marginal productivity theory and its eriticism.
bution." With reference to its application to distr
we may repeat that the theory is true Wages
There we explained the theory states that, under con- only under Cer.
ditions of perfect competition, every worker of same
tain assumptions such as
perfect competition perfe
skill and efficiency in a given category will receive a mobility of labour from employment to employmen
homogeneous character of all labour, constant rates of
wage equal to the value of the marginal product of
interest and rent and given prices of the product.
that type of labour.
It is a static theory. The actual world is
We may repeat that the marginal product of dynanmic.
All the factors assumed to be constant are in fact
labour in any industry is the amount by which the con
stantly changing. Competition is never perfect; mo
output would be increased if a unit of labour was in- bility of labour is restricted for various reasons;all
creased. while the quantities of other factors of pro- labour is not of the same grade; remuneration to other
duction employed in the industry remained constant. factors of production doesn't remain constant; and the
In short, it is the output attributable to a single unit prices of the products of labour vary. All these changes
of labour unaccompanied by any change in other fac- modify the theory when applied to actual conditions
Lors of production. The value of the marginal
product The theory, however, as an assertion of a tendency. B
of labour is the price at which the marginal product true and is valuable in understanding the basic fonts
can be sold in the market. that determine wage rates.
Under conditions of pertect competition, an em- n the real world, owing to the absence ot te

ployer will go on employing workers until the value
of the product of the last worker he employs is
equal
to the marginal or additional cost of employing the
last worker. Further, the condition of perfect compe-
tition implies that the marginal cost of labour isal-
ways equal to the wage rate, irespective of the num-
ber of workers the employer may engage. Every in-
dustry being ultimately subject to the law of dimin-
above assumptions, there is no single rate of wago
that may be applicable to all labour of a particular yA
Wages differ from place to place, from person to per
son and from employment to employment.
The following further points of criticism may la
benoted:
to
te
suy, the theory has litle applicabilityof ne
sane

is perfectly mobile. Workers

ishing returns. this marginal product must start de- y. Labour not
SKill and efficiency may not receive the same
wagesal
clining sooner or later. Wages remaining constant, the
two different places.
employer stops employing workers at that point where
value of the marginal product of a worker is equal to
the wage rate. 3 See Chapter 31.
 359
Wages
Cecondly, though the condition of a large num- the
thinks that the labourer cannot get
Taussig
ber
f independent buyerS of labour is
fulfilled for a full amount of the marginal output. This is e
DCe
ndustries of all countries and for most industries of labour
production lakes timc and the final product
e e COuntries, the employerS usually combine to
cannot be obtained immediatcly. But the labourers have
isadvantage of the worker. It is a case of monop- to be supported in the meantime. This is done by the
tsony. .One
. buyer and many sellers. The employers employer does not pay the
The
l in pulling downithe wages below the value of Capitalist employer.
Tull amount of the expected marginal product of labour
s Tinal net product of labour. If
employees are He deducts a certain percentage from the final output
ua collectively organised, the wage rates may or may in order to compensate himsclf for the risk he
takes in
he equal to the values of marginal net product of making an advance payment. This deduction. accord
no
lahour in the occupations or industries concerned. The is made at the current rate of interest.
al ing to Taussig,
ages are determined by the relative bargaining
wag Thus, wages the total product of labour on
equal
strength of the two parties. but cannot exceed the value
the marginal land or in the marginal firm minus the
net product of labour.
of the marginal amount discounted explained above. The present
value
Thirdly, the market for goods is in general of the product is ascertained by discounting its antiC
characterised by impertect competition, this also un- pated future returns.
settles the theory. Two weaknesses of the theory have been
Fourthly, the productivity of workers is also de- himself. First, that it is "a dim
recognised by Taussig
pendent on factors such as the quality of capital and and abstract one, remote from the problem of real life".
efficient management. These factors are outside the To this he replies that this weakness is common to al
control of workers. economic generalisations. Second, and a more seri

Fifthly, it should be borne in mind that the mar-
ginal net product of labour depends not merely on the
supply of labour but also on the supply of all other
factors of production. If other factors are plentiful and
labour relatively scarce, the marginal net product of
labour will be high, and vice-versa.
Finally, productivity is also a function of wages.
Low productivity may be the cause of low wages,
which may tell on the efficiency of the worker, lower
his standard of living and ultimately check the supply
of labour. The theory takes the supply of labour for
granted.
Conclusion. In short, the marginal productiv-
on the
ity theory ignores the effect of wage changes
supply of labour, bargaining strength and nmonopoly
conditions, etc.
Rejecting the marginal productivity theory,
Marshall said: "This doctrine has been put forward
as
Ous, objection is that the joint product is discounted at
the current rate of interest. But according to his own
analysis, the rate of interest is a result of the process of
advance to the labourers, because it depends on the
excess of what the labourers produce in the future over
what is advanced to them in the present. This would
mean arguing in a circle. To meet this difficulty Taussig
Suggests that we determine the rate of interest inde
pendently of marginal productivity by the rate of time
preference, and with the interest thus determined dis-
count the marginal product of labour. This, however
it.
hardly solves the difficulty; it merely evades
is another
Taussig's theory ultimately analysed
version of the Residual Claimant Theory of Wages.
He says, in fact, that wages are what is left after rent.
interest and profits are deducted from the total output.
As such, the theory is open to all the objections put
forward against the Residual Claimant Theory.

a theory of wages. But there is no valid ground for any MODERN THEORY OF WAGES
such pretension.. . Demand and supply exert equally
a claim to
Although labour has certain peculiarities and can-
important influences wages; neither has
on not be regarded as an ordinary commodity, still wages
either blade of a
predominance; any more than has are very largely determined by the
interaction of the
the doc-
SCISSors, or either pier of an arch.. . . (but) forces of demand and supply as in the case of an ordi-
trine throws into clear light one of the causes that govV
of wages is
nary commodity. Thus, the Modern theory
erns wages." the demand and supply theory.

Taussig's Theory of Wages Demand for Labour

The American economist Taussig gives a modi-
"The demand for labour by the individual firm is
of
fied version of the Marginal Productivity Theory a function of both the productivity of
labour and the
Wages. According him, wages represent the mar
to In other words,
money demand for the firm's product."°
ginal discounted product of labour.

4. Marshall A., Principles. pp. 518, 538. 6. Allen M. Carter. The Theory of Wages and Employ-
5. For a detailed study consult Readings in the Theory mem. 1959. p. 45.

of Income Distribution, pp. 278-293.

 Modern Economic Theory
360
the demand for labour reflects patly labour 's produc
Supposc. the mployer employs
iEveryashhioWeng Taddtstnwar (mmeta
value of the product at onc. After a point, the law of dimini
tivity and partly the markct returns wil come into operation
difterent levels of pmduction
labour employed will add to the
is aderivcd demand. total
The demand for labour at diminishing rate. The employer wil net
18 denived fnom the demand for the
commodities it helps
consumer demand
for the
employing additional labourers
t ne natuprralolyhetsn
to
produce. Greater the the cost of employing a
labourc point
ddition madejustby eqals tich
for the labour
pndact. the greater the producer demand is little less than) the
required in may be
making it. Itobserved that it is
of the total net product. hi (in faca
demand for the the
epected demand and not existing vali
Thus, the wages that he will
that determines demand for labour. Hence,
an
praduct pav to
will (the marginal unit of labou
be such ala
pevted increase in the demand for a commodity that of this additional product equal to the
increase the demand for the type of labour
or
marginal p va
productes this commodity.
since all the labour units are
supposed to be vity Ba
Apartfrom the magnitude of demand (i.e., big
neous, what is paid the

to all the labourers.

marginal worke homnge
will be
or paid
or small). we have also to consider its elasticity

The elasticity of Thedemand schedule of the employer s

responsiveness to change in wages.
demand for labour depends on the elasticity of
demand
for its output. Also, demand for labour will generally
be inclastic if their wages form only a small proportion
hand,
of the total wages. The demand. on the other
will be elastic if the demand for the commodity it
produces. is elastic or if cheaper substitutes
are
available.
The demand for labour also depends on the prices
and the quantities of the co-operating factors. Suppose,
the machines are costly, as is the case in India,
obviously more labour will be employed. The demand
for labour will be more. Also, the greater the demand
will be the
for the co-operating factors the greater
demand for labour.
Another factor that influences the demand for
labour is the technical progress. In some cases, labour
and machinery are used in definite proportions. For
is like the demand scheduleof the consumer or lanewu
modity, i.e., lower the wage, the larger rfor acom
the num
workers demanded. With the larger labour f
put will expand and each unit of output will
e tote
sold at a lower price. This is an additional reac
marginal productivity of industry as a whole
the other reason being a decline in the
marginat
decines,
oul
put.
The change in wage rate determines the
dire
tion of change in the demand for labour but the i
greeof this change depends on the elasticity of t
mand for labour. In case of elastic demand, a small
change in the wage rate will lead to a considerable
change in demand for labour, and vice-versa. Whehe
the demand for labour is elastic or not will depend on
(a) the technical conditions of production and (6)elas
ticity of demand for the commodity which that labour
produces. Generally, the short-term demand for labou

instance, the introduction of automatic looms reauces is less elastic that the long-term demand. That is why

the demand for labour. the employers and the trade unions adopt a stif ati
Thus, demand for labour is determined by (a) the tude in wage negotiations.
nature of demand for the product of labour, (b) the In fact, for any particular employer, work1ng un
of labour the total cost of the der pertect competition, wages are already setled by
proportion of the cost to
product. (c) its substitutability by other factors, and the market forces. Each firm constitutes sosmala
cannot intluenee
(d) supply of capital determined by the ability and
as
portion of the entire industry that it
of investors to save and invest. more or less of labour
willingness wages appreciably by employing
The supply curve of labour confronting each prodI
After considering all relevant factors, e.g.
IS perfectly elastic, i.e., horizontal line at the leve
demand for the products, technical conditions, the
the market wage rate. The individual demandcurie
prices of the co-operating factors, elc, the employer
is governed by one fundamental factor, viz., marginal etermined by marginal productivity. The indivuOL
labourers as will equate u
productivity. The demand for labour, under typical employer hires as many f
with the rate was
circumstances of a modern community comes from the marginal productivity of labour
in the market.
employer, who enployees labour and other factors of
In Chapter31, we have given twodiagrans
production for making profits out of his business. The shows the dem
demand price of labour, therefore is the wage that an a look at them again. Fig. 31.5 (a)
employer is willing to pay for that particular kind of for labour of an individual firm and Fig. 31 >ary t o remember

labour. demand of the industry. It is necessaly