In many European economies and the United States, minimum wages are established for ensuring decent living standards for all and reducing income inequality. In developing countries as well, the wage rate has proved to be useful policy instrument in alleviating poverty and reducing income inequality.
It is being increasingly recognised now that if minimum wages are effectively designed and enforced, they could improve the standards of living of workers; and most importantly, permit the workers to effectively invest in the future of their family and children in this era of knowledge economy.
In terms of a theoretical understanding, the classical subsistence theory of wages of the 18 th and 19 th centuries, known as the Ricardian theory of wages, relied heavily upon the Malthusian postulation which held that the wages would inevitably tend towards the minimum owing to an ever-increasing population.
Next, the wage-fund theory, also from the classical era, proposed that wages depended on the relative amounts available with employers for payment of workers and the size of the labour force. Wages increase only with an increase in the resources of the employers or a decrease in the number of workers. Third, the 20 th century saw the emergence of the marginal revenue productivity theory, which stated that wages are determined by the incremental revenue created by the deployment of the last worker.
Finally, later and contemporary propositions have been linking wages with collective bargaining, existence of sticky wages, promulgation of stipulated minimum wages through the law, and so on. Additionally, there are factors like capacity to pay. For example, the old textile mills in India pay much less compared to the newer ones since they do not make much profit and many actually sustain losses. On the flip side, in select cases employers retain workers at wages higher than those prevalent in the market, based on social contracts, personal trust, etc.
Thus, wages could differ for the same jobs across establishments, locations, and for a number of other reasons. Ultimately, what matters is whether workers get at least the minimum emoluments and whether there is some sense of fairness in wage determination. Next, should markets alone determine wages? While conventional wisdom suggests that artificially pushing up wages beyond what the market sets, reduces the employment levels,.
Further, in certain settings, keeping wages high might actually motivate workers to raise their productivity and off-set the increased costs of higher wages. Data from the United States for the second half of the 20 th century suggest that there has been no overt increase in unemployment owing to fixing minimum wages. Workers are also guaranteed pension payments. The Maharashtra Employment Guarantee Scheme Act of had stated that the wages to be paid under the Scheme should be fixed at a rate somewhat lower than the prevailing wage rates in agriculture so as not to affect agricultural activities.
Overall thus, markets are not what they are theoretically assumed to be: they are complex and segmented, and there are forces beyond demand and supply that determine and impact wages.
In the contemporary era, demographic pressures are also responsible for keeping wages and earnings low. The current debates on wages in developing countries are generally pivoted on four pillars: minimum wages and their implementation, both in the contexts of actual enforcement and impact on market equilibrium; wage-productivity linkages; inequity and inequality in wages by gender, ethnicity, others ; and wages being a mechanism for alleviating poverty.
For example, if the demand for labour is very inelastic, perhaps because there are no substitutes for labour, the effect of a strike is to raise the wage rate, but leave employment largely unaffected. The result is that workers will gain as a group, even though some individual workers will lose their jobs. Go to wage differentials.
Go to economic rent and transfer earnings. Stagflation is a combination of high inflation, high unemployment, and stagnant economic growth. Because inflation isn't supposed to occur in a weak economy, stagflation is an unnatural situation.
Slow growth prevents inflation in a normal The laissez-faire economic theory centers on the restriction of government intervention in the economy. Workers who have specialist skills will generally be awarded higher pay. This is because, for jobs with specific qualifications, supply is more restricted — more inelastic.
This shortage of supply pushes up wages. For a job like a burger-flipper, most people are qualified, so supply is more elastic. Non-monetary benefits. If a job is considered desirable for non-monetary benefits, the supply may be relatively greater compared to other jobs. For example, many public sector jobs — nursing, teaching have wages lower than equivalent private sector jobs.
Demographic factors. If there is an ageing population, there could be a shortage of young, skilled workers. In theory, this would push up wages. Fre movement of labour and the net migration of unskilled workers could lead to lower pay for jobs, such as fruit picking. This diagram shows trends in real wages since Since , we have seen a fall in real wages. This is due to several factors. The average wage in our Country is low compared to the ever increasing Cost of Living.
I was paying into a health plan, k and taxes. Something needs to be done about this. If wages were comperable to cost of living our economy might be better off, because then you would have more people spending, but that will never happen will it? We are not a country with opportunities, where every man has an equal chance, we are slaves to the system.
Readers Question: What factors determine the wage that someone receives? MR — Marginal revenue of last good sold — Effectively the price and demand for the good that the worker produces. More on Marginal Revenue Product and determination of wages If we take wages for strawberry pickers.
Diagram of wage determination for two different types of workers On the left, demand and supply are both elastic. This could be a cleaner — a job with relatively low skill requirements, meaning many people can do the job. On the right, demand and supply are more inelastic, leading to higher pay. This could be a job like an accountant. Supply-side factors As well as demand, pay will be determined by supply.
Limitations of this theory It is difficult to measure productivity. As a teacher should my pay depend on the results of my students? It becomes a normative judgement. It assumes competitive markets. But, in practice many labour markets are imperfect.
Either firms have monopsony power or workers form trades unions. Firms with monopsony power are often able to ignore MRP in setting wages and pay relatively lower wages. Workers in strongly unionised industries may be able to claim higher pay. But, it becomes a very normative judgement to decide who deserves what. But economic forces are unlikely to lead to equal pay.
Pay will also vary depending on cultural differences. The best hockey players in Pakistan will be rewarded with high pay because it is one of the national sports. But, in England, hockey is a minor sport, so pay is relatively lower.
Wages determined by Labour Market imperfections In the real world, wages will also be determined by other factors Monopsony employers. Monopsonies can pay lower wages to workers because they have market power in setting wages. Some employers may get lower pay or find it harder to get jobs because they are discriminated against.
Trade unions. Workers in unions may be able to get higher pay because the union can put pressure on the employer to increase wages Historical trends in wages This diagram shows trends in real wages since Poor productivity growth. Firms cannot afford higher wages due to decline in productivity growth.
See also Labour market imperfections Labour markets Performance related pay. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement. However, you may visit "Cookie Settings" to provide a controlled consent.
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Subsistence theories emphasize the supply aspects of the labour market while neglecting the demand aspects. They hold that change in the supply of workers is the basic force that drives real wages to the minimum required for subsistence that is, for basic needs such as food and shelter.
Elements of a subsistence theory appear in The Wealth of Nations , where Smith wrote that the wages paid to workers had to be enough to allow them to live and to support their families. The English classical economists who succeeded Smith, such as David Ricardo and Thomas Malthus , held a more pessimistic outlook.
Subsistence theorists argued that the market price of labour would not vary from the natural price for long: if wages rose above subsistence, the number of workers would increase and bring the wage rates down; if wages fell below subsistence, the number of workers would decrease and push the wage rates up. At the time that these economists wrote, most workers were actually living near the subsistence level, and population appeared to be trying to outrun the means of subsistence.
Thus, the subsistence theory seemed to fit the facts. Although Ricardo said that the natural price of labour was not fixed it could change if population levels moderated in relation to the food supply and other items necessary to maintain labour , later writers were more pessimistic about the prospects for wage earners. Smith said that the demand for labour could not increase except in proportion to the increase of the funds destined for the payment of wages.
Ricardo maintained that an increase in capital would result in an increase in the demand for labour. Smith defined this theoretical fund as the surplus or disposable income that could be used by the wealthy to employ others. Ricardo thought of it in terms of the capital—such as food, clothing, tools, raw materials, or machinery—needed for conditions of employment.
The size of the fund could fluctuate over periods of time, but at any given moment the amount was fixed, and the average wage could be determined simply by dividing the value of this fund by the number of workers. Regardless of the makeup of the fund, the obvious conclusion was that when the fund was large in relation to the number of workers, wages would be high.
When it was relatively small, wages would be low. If population increased too rapidly in relation to food and other necessities as outlined by Malthus , wages would be driven to the subsistence level.
Therefore, went the speculation, labourers would be at an advantage if they contributed to the accumulation of capital to enlarge the fund; if they made exorbitant demands on employers or formed labour organizations that diminished capital, they would be reducing the size of the fund, thereby forcing wages down. It followed that legislation designed to raise wages would not be successful, for, with only a fixed fund to draw upon, higher wages for some workers could be won only at the expense of other workers.
After the wages-fund theory was discredited by W. Thornton, F. Longe, and Francis A. Walker , all of whom argued that the demand for labour was not determined by a fund but by the consumer demand for products. Indeed, the total amount paid in wages depended upon a number of factors, including the bargaining power of labourers. Despite these telling criticisms, however, the wages-fund theory remained influential until the end of the 19th century. Marx blamed unemployment on capitalists. Furthermore, Marx held that, in capitalism, labour was merely a commodity: in exchange for work, a labourer would receive a subsistence wage.
Marx speculated, however, that the owner of capital could force the worker to spend more time on the job than was necessary for earning this subsistence income, and the excess product—or surplus value—thus created would be claimed by the owner. This argument was eventually disproved, and the labour theory of value and the subsistence theory of wages were also found to be invalid.
Without them, the surplus-value theory collapsed. The residual-claimant theory holds that, after all other factors of production have received compensation for their contribution to the process, the amount of capital left over will go to the remaining factor.
Smith implied such a theory for wages, since he said that rent would be deducted first and profits next. In Walker worked out a residual theory of wages in which the shares of the landlord, capital owner, and entrepreneur were determined independently and subtracted, thus leaving the remainder for labour in the form of wages. It should be noted, however, that any of the factors of production may be selected as the residual claimant—assuming that independent determinations may be made for the shares of the other factors.
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