Human Resource Management

Theories for determination of wages

There are different theories for the determination of wages and these are discussed below:

1) Subsistence theory for determination of wages: this theory was given by Ricardo and based on two assumptions:

i) Law of diminishing returns

ii) Rapid increase in population.

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.

2) Wage fund theory for determination of wages: this theory was given by Adam Smith and further expounded by J. S. Mill. This theory is based on the assumption that the wages are paid out of predetermined fund. If the fund is large wages would be high and if the fund is small wages would be reduced to the subsistence level. The demand for laborer depends upon the size of the fund and wages depends upon the demand of labor. Thus to increase the wages first the wage fund should be increased than the number of workers should be reduced.

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.

 Thus, wages are determined by number of factors and depend upon the organization to organization. These are the theories for determination of wages.

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