Theory of wages

1. Wages Fund Theory:

• This theory was developed by Adam Smith
(1723-1790).
• His theory was based on the basic assumption
that workers are paid wages out of a pre-
determined fund of wealth.
• This fund, he called, wages fund created as a
result of savings.
• According to Adam Smith, the demand for
labour and rate of wages depend on the size
of the wages fund.
• Accordingly, if the wages fund is large, wages
would be high and vice versa.
 2. Subsistence theory

• As per this theory there should be minimum

limit of wages below which labor supply will not
be available.

• If the workers were paid more than the

subsistence wages their number would increase
and this would bring down the rate of wages
and if the wages fall below the subsistence level,
the number of workers would decrease.
• Thus the natural price of labor is that price
which is necessary to enable the laborers one
with another to subsist their race without
either increase or decrease.
 3) Surplus value theory
• this theory was developed by Karl Marx.
• As per this theory the price of the product is
determined by the labor time needed to
produce it and the surplus goes to be utilized
for paying other expenses.
 4) Residual claimant theory
• Francies A. Walker has given this theory.
• As per him there are four factors of
production land, labor, capital and
entrepreneur.
• Wages are paid to the labors after paying of
the land, capital and entrepreneur that is why
they are called residual claimant.
• The wages are equal to production minus rent,
interest, and profit.
 5) Marginal productivity theory
• This theory was developed by Henry
Wicksteed and John Clark.
• According to this theory wages are depend
upon the demand and supply of labor.
• Workers are paid as per what they are
economically worth.
 6) Bargaining theory

• This theory given by John Davidson.

• As per this theory wages are determined by
the bargaining power of the workers and of
the employers.
• This is possible in big organizations where
labor is well-organized.
 7) Behavioral theory

• many researchers, scientists have contributed

in this theory like March, Simon, Dubin.

• As per them wages are determined by the

size, status of the company, strength of the
union, contribution by different kinds of
workers etc.