MicroEconomics

Topic:WAGES
DEFINITION
Wages may be defined as “A sum of money paid under contract by an employer
to a worker for services rendered”.

OR

Wages can also be defined as “Payment due to ordinary employees,skilled or

unskilled”.

If wages are received on the basis of time these are called Time Wages.

If wages are received on the basis of work done these are called Piece Wages.
General wages are the share of national income claimed by labour as such,as
against the other factors of production.

Relative wages refer to wages in relation to different employments and to

different persons in the same employment.

Classification of wages:
Wages may also be classified as Nominal wages and Real wages.
Nominal Wages:
Nominal wages are wages paid or received in terms of
Money.

Real Wages:
Real wages are equal to money wages plus the extra facilities and
concessions earned by workers.

Although money wages are equal yet real wages of the person who is also
receiving extra facilities are higher.
FACTORS DETERMINING REAL WAGES:
1. Purchasing Power Of Money:
It means that how much amount of goods can be
purchased and services can be received with a unit of money.
2. Subsidiary Earnings:
If an employee is earning extra money wages or getting facilities
in addition to the regular money wages,his real wages will be more.

3. Extra Facilities And Concessions:

Those employees who are receiving concessions
like free medical facilities or free transport facilities etc,have higher real wages as compared
to those who have not been provided with facilities.
4. Extra Work Without Extra Payment:
Those employees who receive
extra payment for extra work,their real wages are low while those employees
who receive extra payment for their work.

5. Conditions Of Work:
If working conditions are healthier i.e
cleanliness,ventilation etc,real wages are more than those persons whose working
conditions are not good.

6. Timings Of Work:
Greater are the working hours,lower are the real wages.fewer
are the working hours,greater are the real wages.
7. Nature Of Work:
If the job is easy and it does not affect the health of workers real
wages are high but if the job is difficult and it affects the health of workers real wages are
low.
8. Regularity And Irregularity:
If the job is regular and secured although money wages
are low yet real wages will be higher than an employee whose job is neither regular nor
secured.
9. Future Prospects:
Those professions where future prospects of promotion or
increase in income are brighter real wages are higher.
10. Relation Between Employer And Employee:
If the relations between employer
and employee are good,real wage of employee is higher because his efficiency increases.

11. Expenditures Of Profession:

If the expenditures of profession are low,real wages
are high and if the expenditures of profession are high real wages are low.

12. Power:
The employees who have more powers,real wages are higher than those
employees who have less powers e.g powers of a magistrate are more than a lecturer.
THEORIES OF WAGES:

Some of the theories for real wages are the following:

(a) Subsistence Theory:

According to this theory wages tend to settle at the
level just sufficient to maintain the worker and his family at the minimum
subsistence level.

Criticism:
1. This theory explains that wages are determined at subsistence level while
determination of subsistence level is impossible because price level
fluctuates frequently.
2. This theory applies on those countries where majority of people are poor and
standard of living is low but this does not applies in developed countries.
(b) Wage Fund Theory:
This theory was presented by J.S Mill which
states that “Wages to the hired labour are paid out of the wage fund
established separately by the firm or entrepreneur”.
Wage rate= Wage fund/No of labourers
Criticism:

1. The theory is criticized that no separate wage fund is established to pay

wages.
2. It appears from this theory that efficiency of labourers is equal and hence
equal wages should be paid but it is wrong.
(c) Residual Claimant Theory:
This theory was presented by
Prof.Walker.The theory explains “After rent,interest and profit have been paid
the remainder of the total output goes to the workers as wages.

Criticism:
1. According to this theory after rent,interest and profits are paid remainder
of total output goes to wages but the remainder is not wages but profits.
2. If the remainder is nothing labour will get nothing and if business face
losses the labour will also face losses but it does not happen in real world
because wages are always predetermined.

Story for illustration purposes only

(d). Marginal Productivity Theory Of Wages:
According to this theory “Wages of
the workers tend to equal the marginal productivity of the labour”.
CRITICISM:
1. It is assumed that the efficiency of labour is equal which is impossible.
2. Theory assumed perfect mobility of labour which is also impossible.
3. Theory does not explain why wages are different at two places of the workers
having same efficiency and skill.

(e). Modern Theory Of Wages:

Modern theory of determination explains that
“Although labour has certain particularities and cannot be regarded ordinary
commodity,still wages are largely determined by interaction of the forces of
demand and supply”.

We analyse demand and supply of labour to explain this theory.

DEMAND AND SUPPLY
DEMAND:
1. Demand for labour is indirect while
demand for goods is direct i.e demand
for labour depends on the demand of
goods which are produced with the help
of labour.
2. Demand price for labour depends on the
prices of the factors which have to be
used with the labour.
3. Demand for labour depend on their
marginal productivity.
SUPPLY:
1. Supply of labour depends on the
social,cultural and political conditions.
2. Supply of labour depends on the size of
population.
3. Supply of labour also depends on
conditions of work.If conditions of work are
favorable supply of labour decreases.
4. Supply of labour for a firm is elastic.
DIAGRAM:
In the diagram Dn is the demand
curve and Sn is the supply curve of
labor.Both demand and supply curve
intersect each other at point E’ and
OW will be the wage rate and OM
number of labour will be employed.
RELATION OF DEMAND AND SUPPLY WITH WAGE RATE:

1. If demand for labour increases while supply remains the same wage rate
increases.
2. If demand for labour decreases while supply of labour remains the same
wage rate will decrease.
3. If supply of labour increases while demand for labour remaining the
same,wage rate will go down.
4. If supply of labour decreases while demand for labour remaining the
same,wage rate will increases.
CONCEPT OF MINIMUM WAGES:

The capitalists and producers exploits the labour when supply of labour is greater
than its demand and pay wages less than their marginal productivity.To avoid
exploitation of labour from capitalists and industrialists government determines
minimum wages and to pay wages less than minimum wage rate is a legal
offence.

While determining wages efficiency of labour,general price level and nature

of work is kept in view.This standard of wages does not always remain the same.It
changes with the changes in price level.
ADVANTAGES AND DISADVANTAGES:
Advantages:
1. With the determination of minimum
wages none of the industrialists or
capitalists can exploit labour because
they are bound to pay minimum wages.
2. While determining minimum
wages,general price level is kept in
view .Labour is able to purchase basic
necessities of life.
3. The minimum wages are determined
according to the efficiency so relations
between labour and industrialists
become good.
DISADVANTAGES:
1. With the determination of minimum
wages,cost of production
increases.Capitalists will decrease the
number of workers or use machinery
instead of workers so unemployment
will increase.
2. When minimum wages are determined
the,wages paid to all labours are equal
and this decreases interest of efficient
labour.
3. Standard of minimum wages cannot be
maintained because of the fluctuation
in general price level.
TRADE UNIONS:
A trade union is an organization of labourers/workers whose aim is to make
conditions of better work,attainment and security rights of labourers and workers.

Those organizations not only try to bring material welfare but also work for
increase in normal and social values or by improving conditions of work.

OR

Trade union is a “Continuous association of wage earns for the purpose of

maintaining or improving the conditions of their employment”.
DUTIES AND OBJECTIVES:
1. Forcing the entrepreneur to pay wages equal to marginal productivity of
labour
2. To make conditions of work better e.g proper lightning,cross ventilation etc
3. Creation of unity among labourers and strengthening their bargaining power.
4. To make arrangements for proper working hours.
5. Presenting demands of labours to management.
6. Providing financial assistance to unemployed workers during sudden demise
and in case of accidents.
7. Increasing the Social and Moral values.
8. To protect the interest of their members.
How Trade Unions raise wages?
1. Raising wages equal to marginal revenue product.
Generally entrepreneurs,industrialists and capitalists pay wages to labourers and workers
less than their marginal revenue product because bargaining power of labor is weak.But by
strengthening the bargaining power trade unions can raise wages upto marginal product.
2. Increasing the Marginal Productivity of labour.
If the entrepreneurs are already paying the wages according to marginal productivity
following steps should be taken to increase it
(a) By forcing the employer to use modern machinery so that efficiency of labour
increases.
(b) By increasing moral values of labours e.g honesty,hardworking,etc and to get
better education,training and skill.
(c) Trade unions may increase marginal productivity of labour by restricting the
supply of labour.
(d) By improving conditions of work in the factories.