| ' ' Chapter-51 WAGES anes AE ete MEANING Wages are a payment for the services of labour, whether mental or physical. Though in ordinary language an office executive, a minister or a teacher is said to receive a salary; a lawyer or a doctor a fee; and skilled oe unskilled worker a wage, yet in economics no such distinetions are made for different services and all of thers ae said to receive a wage In other words, wages include fees, commissions and salaries. It is another thing that some may be receiving more in the form of real wages and less in terms of money wages and vice versa, We shal refer to this problem later on. Time and Piece Wages. Wages may be paid weekly, fortnightly, or monthly and partly at the end of the year in the form of bonus, These are rine wages. But the bonus may be a task wage if work is finished within a specified period or before that, Sometimes, time wages are_ supplemented by wages eamed by working ones time, They ae overtime wages. Wages ae also paid in accordance with the amount of work dont, say ine stoe factory or a tiloring department as per one pair of shoes or pants manufactured. Ifthe rate per pal of shose or for pants is Rs 50, a worker will be paid according to the numberof pais of shoes or pants manufactured. These will be piece wages. 2. MONEY WAGES AND REAL WAGES Money wages or nominal wages relate to the amount of money income received by workers for their services in production. Real wages include the various facilities, benefits and comforts which workers reseive in terms of goods and services for their work. These are in addition to the money wages of workers Real wages depend upon the following factors. J. Price Level. the purchasing power of money depends upon the price level. When the price level rises, ihe purchasing power of moncy gets reduced, thus adversely affecting the real wages of workers. Every ease In the price level reduces the purchasing power of moiy. This leads t0 a fallin the real wages cf worker 7, Money wages. The size of the pay packet received by the worker is an important determinant of his real ‘wages, The greater the money wages, the greater will be the real wages, other things remaining the same. 23. Regularity of Work. A permanent job, even though it carries a smaller money income, fs considecd 10 be better than a temporary job which may yield high reward in terms of money. 5 + Nature of Work. The nature of work also plays an important role in determining the level of real wages. Some jobs are pleasant, while others are not. Similarly, some occupations are enjoyable while other are Alisagrecable, All these considerations have to be given weightage in determining real wages, 5, Future Prospects. An occupation carrying the promise of better prospects of promotion in the future iconsidered fo be better than the one which does not do so, even though the money wages offered by the latter may be high, 6 Exira Benefits. In some occupations, employees receive in addition to their pay, some extra benefits. See eumple, the manager ofa firm gets in addition to his pay, a well furnished bungalow, free medical help et. Such benefits increase the real wage of a worker. 7 Trade Expenses. This refers to the expenses one has to incur inthe course of one’s oscupation. These expenses are high in some occupations while in others they may be moderate. These expenses should be deducted from the money income in order to arrive at the real wage. 5. Social Prestige. The real wages of employees engaged in prestigeous occupations are high as compared to the real wages of employees working in ordinary occupations.£28: Microcconomie Theory influenced by the form of payment. Generally. workers are paid ‘addition «0 money wages, workers receive subsidised ration or Tor tooch and living quarters, All these facilities increase the real wages of workers. wi Conditions of work also affect real wages. In some cases, it is found that 9. Form of Payment. Real wages are it money wages. But in certain occupations, in 10. Conditions of Wor cond not congenial and they adversely afect their health. In such cases, the real wages of workers are low. 3. THEORIES OF WAGES Different theories have been put forward from time to time to explain as to he rain elements of these theories are explained below. 1. The Subsistence Theory of Wages “The subsistence theory of wages was first formulated by the Physi of 8th century, The theory Was further developed and improved upon by the Iron Law of Wages. cteting to tis theory, labour power isa commodity and is price is determined by is cost of productions Is cor ttucton isthe minimum subsistence expenses required forthe support of the worker and Bis EEiy'so that continous supply of labour is maintained. The exponents of this theory held tal Woes have Siundency to settle only atthe subsistence level or cost of production. If at uny time, Des ‘exceeded this 4 endo J° Fading themselves in blir economic position, would mary. As such, population woul fesse deve et ccly of labour. This tendency would continue to operate until wages were reduesd 1 aa eee feel. If, on the other hand, wages fell below the subsistence level, there would be aria in population through. starvation or diseases among workers, thereby bringing about & shores Te sibply of labour, This tendency would continue t0 operate until wages were again ised the minimum the ry ot aes the subsistence theory of wages reaches the conclusion that the wage level can neither rise nor fall below the minimum subsistence level. jow wages are determined. The jocratic School of French Economists ‘German economists who called it as Its Criticisms ‘This theory has been criticised on the following grounds: Tivnongly Based on the Malthusian Theory of Population, The subsistence theony of wales based an the Matera eetcony of population which, in tum, iS a highly controversial theory and never has ts ‘applications in Wester economies: stig anoully not Correct. Critics also maintain tat historically this theory bas not been cores iS conchicee Groere shows that arise in wages is not necessarily accompanied by an inerese in population, cher itis followed by a decline in the rate of growth of population. ie rots Eaplain Difference In Wages. Labout market is characterised by heterogeneity of "aE rats. if wage rats were to be equal to the subsistence Teel, then they would have been unifom for everyone ‘This is also a proof that the theory is unrealistic. + eo necatded Theory. This theory approaches the problem of wage detern and completely ignores the demand side of labour. This theory is thus one sided sri iy Pessimistic. This theory is highly pessimistic for the working class. It presents a very dak peture of the future of the society 6. No attention to Fffeiency and to be equal to the minimum subsistence productivity. te shows that the subsistence theory of wages is not a sound doctrine as it The discussion given abov fais to presenta correct empirical description ofthe actual facts inthe labour market. . 2. The Standard of Living Theory of Wages ‘The propounders of this theory were some clasical evonomists of the late 19th cent a modified version of the subsistence theory of wages. lied version oF cing theory of wages states that in the long-run wages tend to equal the standard of ving of workers There is some standard of living to whieh workers are habituated. They wily 19 ‘maintain it, tion from the side of supply Productivity. According to this theory, wage rate for all workers tends evel, But it need not be so because workers differ in efficiency and ry who presentedPe swith no tendency to increase or docrease it. Although this level wit. Be ined pamarily by physical or biological requtement, i is deere ned by Social and customary needs which, i tum i ae ary roaring of children. If wages fall below the estab- iar adard of iving of workers, they wil stop having children Te ragpulaon will dectine . The supply of labour willbe Ae Peeeinal productivity will increase and wages will reduce sly itwagesrise above the stadard of living, workers ae an ve more children, Population wil inetease, The “Mply of tour wil is, its marginal productivity wil destine and woges will fl, aE i eis explained in Figure 1 where population = “Fy measured along the hor zontal axis and standard of living on the eee a ie Suppose the line SS, is the standard-of ving level et ‘Fwerkers and Zs the actual level of living curve. At OP level of sr potaion, the workers are maintaining PA! (OS) standard of ving the population rises to OP, level, the opalain, i jung curve will be belove the standard of living curve SS 5 show fy the distance 4M, As a aaa ee otters wl top having children. The population and suppy of lout ‘will decline and wages will Te tard of ving of workers will again equal levelofiving curve a pont ‘On the other hand, ifthe ee aon falls to OP, level, the actual level-of-iving curve will Be Ubove the SS, curve, as shown by the aera, Consequently, the workers will have more children, The Populi ‘and supply of labour will Mian Syages wl fall The standard of living of workers will agtin equa! het actual level-of-living curve at point. Thus wages tend to equalthe standard 10 living of workers in ‘the long-run. Its Criticism ‘This theory is better than productivity of workers. Despit ‘Standard of Living PP, the subsistence theory of wages because it takes into account efficiency and this itis not free from eertain eriticisms. ivy ot wordent "The theory states thatthe standard of living determines wages, Bat standard of living. ip also dscenited by wages. The stindad of living ofa worker depends upon the Wales he receives. Thus the Sonderd of living and wages are interdependent. Standard of Living not Fixed. The theory assumé shown by the horizontal line SS, in Figure 1. In reality, increase. SCs 1o Explain Wage Diferentals. This theory is based on the assumption tet WaGre tend to equal the stdacd of ving of workers. This means that all workers reoeive uniform wage workers in different sy sotes and occupations receive different wages. Thus the theory fils fe ‘explain wage differentials. ries and occ tP arom benween Wages and Population, The theory assumes that WaBes <0 population are ditely related. This is a wrong assumption. The experience of advanced ‘countries shows that the rise in argos not accompanied by an increase in population but by a decline in ‘population via the inerease in standard of living. oes the Demand for Labour, Ths theory explains the determination of waBes from the supply side and ignores the dernand side of labour. Thus this theory is a one-sided theory. 3. The Wage Fund Theory ‘The wage-fund theory was propounded by JS. Mil. According to ths theory,“ WHEs: depend upon the proportion berveen population and capital, or rather between the number Of the labouring class who work for Fire and the aggregate of that may be called wage-fund” “the theory says that wages are determined by two factors: 7D Woge Fund Ieis that amount of capital which is Se apart by the entrepreneurs for the direct purchase of the services of labour. 5) Population. It refers to that section of population which enters the Jebout ‘market for employment. 2 Porat nd available for disabution among labourers i a fixed sum the res of FES saving accumulation, Wages depend upon the proportion or ratio between cireulating capital or wage-fund and epulaton. The theory canbe stated inthe form of the following equation: 5 that the standard of living of workers is fixed, as ‘standard of living rises when the wages of workers#30: Microeconomie Theory Wage Fund AW = Tee [aWAverage Wage] ‘This equation shows that wages can increase either when wage-fund increases or when population deoteases. The wage-fund, argues Mill, can be increased by saving which is not under the control of workers. So, if they want an improvement in their wage level, they should reduce the numbers. Its Criticisms This theory has been widely criticised on the following grounds. 1. Unscientific. Crities maintain that this theory rests upon the unscientific idea of a fixed fund. National income is @ flow and not a fund. Wages are paid out of national income and not out of a fixed fund set apart by entrepreneurs for the purchase of the services of labour. 2. No Conflict benveen Wages and Profits. The theory contends that there is a conflict between wages and profits Mill maintained that an increase in wages will necessarily bring down profits. However, this may not happen. For example, during inflationary conditions, both profits and wages increase. Thus. the wage fund theory does not hold good in real life, 3. Differences in Wages, This theory cannot explain the existence of wage differentials among workers ‘This weakness makes the theory highly unrealistic, Crities maintain that ifthe wage fund is fixed and the wage rate depends upon the number of workers seeking employment, then it follows that the wage rate throughout the country must be uniform, But in actual life, this is not the case. 4. Labour isnot Homogeneous. The theory rests upon the assumption that labour is homogeneous. But this assumption is not in conformity with the facis of life. Workers differ in efficiency and productivity. In fact labour is highly heterogeneous. 5. Ignores the Influence of Trade Unions. In modern times, trade unions are able to affect a rise in the wage level. But the wage-fund theory is incompetent to explain this phenomenon. 6. Nature of Fixed Fund. The theory is based upon the idea of a fixed fund. Critics point out that there does not exist anything lke a fixed fund. Even if it exists in the mind of entrepreneur, it is subject to variations. It cannot remain fixed for ever. It ean increase or decrease in accordance with the requirements for it 7. Ignores Productivity. A main defect of the theory is that it completely ignores the effect of productivity ‘on wages. Crities point out that the wage-fund comes from labous. Wages are no doubt deawn out of a reservoir of capital but this reservoir is constantly fed by the products of labour. The higher the efficiency, the higher will be the wages. But the wage fund theory does take note of this fact. Mil himself realized its weaknesses. Bowing down to the critics, he withdrew this in the second edition of his Principles. 4, The Residual Claimant Theory The residual claimant theory of wages was propounded by an American economist Francis A. Walker ‘sho stated that “the wages of labourers are paid out of the product of his industry.” This theory maintains that wages equal the whole product minus rent, interest and profits. In other words, the theory holds that wages are equal to the product of the industry minus deductions for the other three factors of production. The theory regards workers as the residual claimant of the product of the industry. In the words of Jevons,, “The wages of the working man are ultimately coincident with what he produces after the deduction of rent, taxes and the interest on capital.” ‘The bright aspect of the theory is that if labour puts in more efforts to increase production without increasing the input of other factors, the residual amount which labour claims in the form of wages gets sahanced. In other words, we may say that the theory recognizes labour claim to that portion of national i ‘which is the result of its greater efficiency and productivity. Its C1 The residual claimant theory of wages has been criticised on the following grounds : 1. Entrepreneur is the Residual Claimant, The theory does not explain why labour should be the residual claimant to the product of the industry. In reality, itis the entrepreneur and not the worker who is the residual claimant 2. No Need for a Separate Theory. Critics maintain that factor prices are determined by the forces of demand and supply and there appears to be no need for a separate theory of wages.Wages: 431 3: dgnores Trade Unions. If wages ate a residual, then the progressive increase in wages by trade union action is totally ignored. 4. One-sided Theory. This theory is also one-sided as it approaches the problem {rom the side of demand. ‘The supply side has been completely ignored. 2: Determination of Kent, Interest and Profits major weakness of the residual claimant theory is “its lock of a positive method of determining what the level of ren, interest and profits should ba Conclusion. Nevertheless, the residual claimant theory of wages served a useful purpose in emphasising the significance of efficiency of labour. Labour, by increased efficiency can claim a greater shave ofthe nathaes income. “To some extent, this theory was a precursor of the current marginal productivity theory Which seletes ages to the productivity of the worker.” 5. The Marginal Productivity Theorv of Waces ‘uum saysoeay suos-Isenb pu yUas uvo wang ystnSuNsp Has uo Mer? a\UoUORS Jo SaeIfa ZH SIDE 9)