Note on Wage

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Labor are the important factors of the production. Rewards given to them for their performance are known as wages in economics. It the price of the labor paid for their productive service. Labor is an important factor of production, without labor to work, all other factors will remain idle.

source:studypoints.blogspot.com
source:studypoints.blogspot.com

According to Benham, “A wage may be defined as the sum of money paid under contract by an employer to a worker for services rendered.”

According to A.H. Hansen, “Wages is the payment to labor for its assistance to production.”

According to Mc Connell, “Wage rate is the price paid for the use of labor.”

According to J.R. Turner, “A wage is price, paid by the employer to the worker on account of labor performed.”

In brief, the price paid to labor for its contribution to the process of production is called wages.

Types of Wages

sourcewww.slideshare.net
source: www.slideshare.net
  1. Nominal or money wages

Nominal wage is the amount of money received by the laborer in the process of production. For example, if a teacher teaches and gets Rs. 20,000 per month, then such amount is referred as his nominal wage. Therefore, the nominal wages refers to the wages which are expressed in the form of money.

  1. Real wages

Real wages are the earned money wages into real terms or in terms of products and services that money can buy. Any workers may get many facilities besides his money like medical, free uniforms, motorbike, etc. The market value is also added to money wages to find out the real wage.

Subsistence Theory of Wages

source:slideplayer.com
source: slideplayer.com

The subsistence theory of wages was first introduced by Physiocratic School of French economists of the 18th century. Further, German economists, Lasalle named it as the Iron Law of wages. Later, Ricardo and Malthus also contributed to the theory of wages.

Assumptions

According to Ricardo, this theory is based on the following two assumptions:

  1. Population rate increases faster.
  2. Production of food is subject to the law of diminishing returns.

Criticism of Subsistence Theory

Following are the main defects of the subsistence theory of wages:

  1. One Sided Theory

This theory is one-sided because it examines the wage determination from the side of supply of labor and ignores the demand side.

  1. Pessimistic

Subsistence theory of wages is highly pessimistic for the working labor. It shows that the future of society is dark.

  1. Long Period

This theory is based on the assumption of a long run as it does not explain the determination of wages at a particular time period.

  1. Wrong Assumption of Increasing Population

This theory says that the population increases in geometric ratio due to high wage rate which is wrong. For e.g., in Europe, they do not grow their family due to the high wage rate.

  1. No Difference in Wages

We know that the workers differ in their productivity, and hence, the difference in their wages is natural. But this theory explains that all the workers get equal wages even at different production.

Wage-Fund Theory

This theory is developed by classical economist, J.S Mill. According to J.S Mill, wage level is determined by wage fund and the number of employers. A wage fund is raised to pay the laborer. The wage fund is distributed among the employees .

This theory suggests that wage rate is determined by two factors- wage fund and a number of workers. Wage fund is created out of saving/dividend earned in the previous year. If the dividends are more, wage fund is also larger which is used to distribute to the workers. Since wage fund is not determined by the current level of income of production sectors, It is constant for the given time period. Therefore, the wage rate mainly depends on a number of works. Higher the number of workers, lower will be the wage rate and vice versa.

According to J.S Mill, “Wages at any moment are determined by the amount of money in the wages and the total number of workers in the country.”

Mathematically,

WR = \(\frac{WF}{NW}\)

Where,

WR = Wage Rate

WF = Wage Fund

NW = Number of Working force

The above equation says that the wage rate can increase either by the wage fund or by decreasing the number of labor. Here the wage is directly related to the wage fund and inversely related with number of labor.

Assumptions

  • Wage fund is rose before the employment of workers
  • The workers are paid equally out of the wage fund
  • The units of labor are homogeneous
  • The wage level is flexible to the change in number of workers employed
  • Money is just a medium of exchange

Criticism of Wage Fund Theory

The criticisms of wage fund theory are as follows:

  1. Unscientific concept

Wage funds are the outcome of the National Income. But the wage fund theory says the wages are paid by the wage fund. The creation of a fund to provide wages is completely hypothetical. The employer also determines the wage on the basis of cash flow or through deficit financing.

  1. Fixation of wage fund

The theory has not explained how the wage funds are fixed by the producer.

  1. One sided

This theory is one-sided because it is based only on the demand side of the labor and ignores the supply of the labor.

  1. Uniform wage rate

The theory argued for a uniform wage rate but the wage is paid according to the ability to the workers and its nature. Therefore, they are paid different amount.

  1. Wrong assumption of wage fund

The theory does not explain the change in wage rate and price of goods.

(Jha, Bhusal and Bista)(Karna, Khanal, and Chaulagain)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

  1. According to Benham, “A wage may be defined as the sum of money paid under contract by an employer to worker for services rendered.”
  2. Labor is an important factor of production, without labor to work, all other factors will remain idle.
  3. The subsistence theory of wages was first introduced by Physiocratic School of French economists of 18th century. 
  4. This theory is developed by classical economist, J.S Mill. According to J.S Mill, wage level is determined by wage fund and the number of employers.
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