Wage refers to the monetary compensation received by individuals in exchange for their

labor or services. It is the payment made to employees by employers, typically calculated on

an hourly, daily, or monthly basis. Wages are a crucial component of employment
relationships and play a significant role in determining the standard of living and economic
well-being of individuals and households…..Various theories have been proposed to explain
the determination of wages. Here are some prominent theories of wages:
1. Subsistence Theory: The subsistence theory of wages, associated with classical economists
like Adam Smith and David Ricardo, suggests that wages tend to settle around the minimum
level required for workers to survive and reproduce. According to this theory, wages are
influenced by the availability of basic necessities such as food, clothing, and shelter.
2. Labor Productivity Theory: The labor productivity theory, championed by economists like
John Stuart Mill and Alfred Marshall, posits that wages are determined by the productivity
of labor. According to this theory, workers are paid in proportion to the value they
contribute to the production process. Higher productivity leads to higher wages, as it
increases the value of output.
3. Marginal Productivity Theory: The marginal productivity theory, developed by
neoclassical economists like John Bates Clark, emphasizes the role of the marginal
contribution of labor in determining wages. According to this theory, wages are determined
by the additional output or value created by the last unit of labor employed. Wages will tend
to equal the marginal product of labor.
4. Bargaining Theory: Bargaining theories of wages, such as the collective bargaining theory
and the efficiency wage theory, emphasize the role of negotiations and power dynamics
between employers and workers. In collective bargaining, wages are determined through
negotiations between labor unions and employers. The efficiency wage theory suggests that
employers may pay wages higher than market equilibrium to motivate and retain workers,
leading to increased productivity.
5. Human Capital Theory: Human capital theory, developed by economists like Gary
Becker, focuses on the investment in education, skills, and training as determinants of wages.
According to this theory, individuals with higher levels of human capital, acquired through
education and experience, are likely to earn higher wages due to their enhanced productivity
and value in the labor market.
6. Institutional Factors: Institutional factors such as minimum wage laws, labor market
regulations, and social norms also play a role in wage determination. These factors can
influence the bargaining power of workers, shape the structure of labor markets, and
establish wage floors or standards.
It's important to note that these theories are not mutually exclusive, and wage determination
is influenced by a combination of factors that can vary across industries, countries, and time
periods. Different theories of wages provide different perspectives on the complex interplay
of economic, social, and institutional factors in determining wage levels.