UGC NET Study Notes on Wage Theories

By BYJU'S Exam Prep

Updated on: September 13th, 2023

Wage Theories is an important topic of Paper 2 Labout Welfare Syllabus. UGC NET applicants whose subject is Labour Welfare needs to prepare this topic thoroughly. You can find the detailed Notes on Wage Theories below in the article.

Experts have compiled comprehensive study notes on Wage Theories for your reference.                                                                                                                                                                                                                                                                                                                                                                                      

What are Wage Theories?

  • Wages are the monetary payment to the workers for performing work. Wages are given to the workers on an hourly, daily or weekly basis which plays a key role in boosting their morale, raising their living standard and motivating them to improve productivity.
  • The factors that affect the wages are demand and supply of labour, employer’s ability to pay, trade union, cost of living, current wage rates, job requirement, and state regulations.

Different theories have been propounded for explaining the nature of wages. Let’s understand some of the important wage theories.

1- Subsistence Theory:

  • In 1817, Subsistence theory was given by David Ricardo. This theory mainly sees labour as a part of the population and says that each member of the society should be given sufficient food, clothing and shelter for survival.
  • The subsistence theory was propounded on the basis of the assumption that workers or labours are just like a commodity which is bought and sold in the market. As per this theory, the subsistence level determines the wages of the workers.
  • In case an increase in the wages is more than the subsistence level then the population of labours will increase and as a result, there will be an increase in the supply of labours. Consequently, there will be a reduction in wages.
  • On the other hand, if wages given to workers fall below the subsistence level then there will be a decrease in the supply of labour due to a fall in the population. Consequently, wages will increase.
  • The subsistence theory is also known as ‘Iron Law of Wages’.

2- Wage Fund Theory:

  • In 1930, this theory was given by John Stuart Mill. The wage fund theory was propounded with the assumption that the payment of workers is done out of a pre-determined wealth fund. This fund is made from the savings of the previous year operations of the organisation.
  • The wage level or wage rate is determined by the amount of wage fund and the total number of workers.
  • According to this theory, if the wage fund is large, the wages paid to the workers will also be more. Also, if the number of workers is reduced then the wage rate will increase.
  • The wage fund theory is considered rigid as it says that the bargaining power or trade union cannot increase the wage level and even if they try to do so, then this will discourage the accumulation of capital.
  • The wage fund theory is criticized as it tells about the way to determine the wage rate but does not describe the sources of wage fund. The other drawback is that there is no mentioning of the method of estimating wage fund.

3- Surplus Value Theory of Wages:

  • This theory was propounded by Karl Marx. According to his theory, labours are just like an article which can be purchased by paying ‘subsistence price’.
  • As per this theory, the surplus between the labour cost and product price should be given to the labour.
  • Marx suggests that the displacement of labour is dysfunctional to the system and it will eventually destroy capitalism.

4- Residual Claimant Theory:

  • This theory was given by Francis A. Walker. He considered wages as a residue which is nothing but a mere portion of total revenue left after deducting other expenses like rent, interest, taxes and profits.
  • This theory is criticized because the entrepreneur is the residual claimant. There is no discussion about the influence of labour union on wage determination.

5- Marginal Productivity Theory:

  • This theory was given by John Bates Clark. As per this theory, wages of the workers are determined on the basis of the level of contribution made by the marginal worker.
  • The marginal productivity theory assumes that there is a certain quantity of workers that seeks employment.
  • The wage rate at which the worker can secure employment is equal to the addition to total production. This results in employing the marginal unit of workers. There is an assumption that the production is carried out under the condition of diminishing returns to labour.
  • The shortcoming of the marginal productivity theory is that it fails to explain the differences in wages.

6- Bargaining Theory of Wages:

  • This theory was given by an American economist, John Davidson.
  • According to the bargaining theory of wages, the workers and the employers negotiate to determine the wages and the hours of work.
  • As per this theory, the upper and lower limit of the wage rate is fixed and the actual wage rates depend on the bargaining power of both the employer and the worker.
  • The upper limit is the rate above which the employer will abstain from hiring a certain group of workers, whereas the lower limit is the rate below which workers refuse to work.

7- Institutional wage theory:

  • This theory says that the level of wage rate is determined on empirical and quantitative It is important to do region cum industry comparison.
  • It is an inter-disciplinary approach to compensation that includes such considerations, as the influence of collective bargaining, wage experience and so on.
  • The theory suggests that one must analyse compensation from a dynamic and a continually changing basis.

8- Supply and demand theory:

  • This theory was given by Alfred Marshall. According to him, the demand and supply of labour play a very important role in determining the wages of the labours.
  • According to this theory, the demand price of the worker is determined by the marginal productivity of a single/individual worker. The supply of labour means the number of workers searching for employment for earning wages. The demand for labour refers to the number of workers needed by the organisation.
  • The supply of labour will rise with the rise in the number of working hours and an increase in the wage rate. The demand for labour depends upon the productivity of labour, technology, product demand and the cost of capital inputs.

9- Investment theory:

  • This theory was given by M. Gitelman. As per this theory, the compensation of the worker is determined by the rate of return on the employee’s investment like employee’s education, training and development programmes and experience.
  • Generally, the wider the labour market is, the higher the wages

10- National income theory:

  • This theory was propounded by John Maynard Keynes and is also known as the Full Employment Wage Theory.
  • According to the national income theory, full employment is the function of national income of the country.
  • National income is equal to the total of consumption plus private or public investment.
  • If the national income falls below a level that commands full employment, then it is the responsibility of the federal government to either manipulate any one or all of the three variables so as to increase national income and return to full employment.

How to Prepare for Wage Theories for UGC NET Exam?

Candidates preparing for UGC NET Exam have to prepare for this topic which is an important topic in UGC NET Labour Welfare Syllabus.

  • All the applicants are also advised to solve as many UGC NET Previous Year Papers as possible. Previous Year Papers give you an idea of what to expect in the examination, it prepares you for the types of questions asked in the examination. 
  • UGC NET Mock Tests are also proven to be a great tool for preparation.



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