WAGES

Compiled by Madhav Verma

Chapter check list
 Wages-Meaning,
 Nominal and Real Wage,
 Factors Determining Real wages,
 Marginal Productivity Theory of Wages,
 Discounted Marginal Productivity Theory,
 Modern theory of Wages,

 
Definition of Wages
 According to Benham “ A wage may be defined
as a sum of money paid under contract by an
employer to a worker for the services
rendered.”
 According to Prof. J.L Hanson “Wage is a

payment to a labourer for its assistance to

production”.
Wages-Meaning
 The payment made for the services of labour is
called wages.
 The amount of money paid is called the money

wages or the___________.
 The amount of goods and services which the

labourer can get with his money wage, and

otherwise ,is called the________.
Real and nominal wages.
 Nominal wage is a wage in_________. Real wage is
measured in terms of __________.it will purchase.
1. What will happen if prices rises and your money
wage that is nominal wage remain same?

If prices rises and your money wage remain constant, you will be
able to buy less with the same money…

that means your real wages has fallen/risen.

Thus, real wages are obtained after adjusting for inflation, that is,
for rise in prices in the economy.
Real and nominal wages.
 The term real wage is also sometimes used to
mean the money wages plus the ________benefits
which workers receive in some jobs.

Q. Why do you think a college professors with equal

qualification and skills may prefer lower money
wage rates as compared to the persons employed
as business executives in private firms?
It may be because teaching in college or university offers
some non-monetary benefits such as flexible working
hours, pleasant surroundings, opportunities for advancement
etc. Thus the real wages of college professor will be his
money salary plus the above mentioned non-monetary
benefits which he gets in the teaching profession.
Factors Determining Real wages
 The real wage of labourer depends on the
following factors:
A
B
C
D
E
Marginal Productivity Theory of
Wages
 According to this theory
wages tend to equal
the_________
 i.e., The additional
product which the
employer gets by adding
one more units of labour.
This theory is analogous
to the marginal utility
theory of value.

________=_________
CONCLUSION
It may be pointed out that Marshall and other
orthodox writers do not assert that wages are
determined by marginal productivity. They only
claim that there is a functional relationship
between the rate of wages paid ,marginal
productivity and the number of persons
employed. Therefore, marginal productivity is
the measure of the rate of wages, not its
determinant.
CONCLUSIONS
 The marginal productivity theory throws into
clear light one of the forces that influence
wages(the demand side).Wages are also
influenced by the factors which govern the
supply of labour.
Discounted marginal productivity
theory
 Discounted marginal productivity theory state
that what tends to equality with wages is not
MVP, but Discounted MVP or DMVP.
Wage=_______
 Here___________ is recognized;
 It is argued that all values receivable in future be
discounted by__________, even the values of
marginal product of labour, or any other factor,
When such value cannot be used in consumption
until an elapse of time has taken place.
Discounted marginal productivity
theory
 Problems with marginal productivity theory.
 Deciding upon__________.(interest rate or

market rate)
 Deciding on the________.
 Deciding the _________or product or

immediate result of present valuable

activities.
 
Modern theory of wages.

 According to many modern writers, the wage

rate depends on the demand and supply for
labour.
 Demand:- Labour is demanded because of its
productivity. The employers can never pay wages
higher than the marginal product of labour.
Generally speaking the larger the number of
labourers employed, the less is the marginal
product. This follows from the principal of law
of diminishing marginal productivity which is a
consequence of law of variable proportions.
Modern theory of wages.
 The value of marginal product depends, under
competitive conditions on the price of the
product and under imperfect competitive
condition on the marginal revenue. These two
quantities set the maximum limit to the rate of
wages.
Perfect competition
Wage=MVP
Imperfect competition
Wage=MRP
Modern theory of wages.
 Supply:- the supply of labour depends on its
supply price. At a particular price a certain
number of laboures, will be available for
employment. Higher wages will generally lead to
an increased supply of labour. Lower wages will
generally lead to diminished supply. The price, at
which a certain number of laboures is available,
is the supply price of that amount of labour. The
supply price of labour depends on the standard
of living of workers, the strength of trade
unions and various other factors.
Modern theory of wages.
 Equilibrium:-if we consider a particular group of
labourers e.g., Carpenter the equilibrium rate
of wage for this group of worker will be given
by the point of intersection of demand and
supply curve .This rate will naturally depends on
the shape of the demand and supply curves.
Wage determination under perfect
competition
 The rate of wages will tend to reach equilibrium
at the point where the demand price and the
supply price are equal .If all the people were
exactly equal, as regards their ability, their
wage rate will be the same.
Wage rate under imperfect
competition
 In real life perfect competition does not exist.
The wage rates tend to fluctuate between the
maximum set by the marginal productivity of
labour and the maximum set by the marginal
productivity of labour and the minimum set by
the standard of living below which the labour
will not accept employment.
Wage determination under imperfect
competition
 The actual rates are determined between these
points according to the relative bargaining
power of the workers’ and the employers’
organizations. Generally speaking, Between the
workers’ and the employers the latter are more
powerful. Strikes are difficult because workers
lacks reserve power. As a rule, therefore, wage
rates tend to approach the minimum rather than
maximum .Nowadays trade union have become
very powerful. therefore the wage rate are not
so low now.
Criticism
 The Keynesian theory of employment throws
doubt on the demand and supply theory of
wages. The Keynesian theory shows that the
demand for the labour depends in the part upon
the level of income which depends in the part
upon the level of employment which is one of
the variables supposed to be determined by the
demand and supply of labour. So the
determination of wages cannot be isolated
from the numerous variables which determines
the level of employment and income.
Thank you