Important theories of wages in compensation management are mentioned below:
Theories of Wages
1. Subsistence Theory:
This theory was propounded by David Ricardo. Ricardo states that “The labourers are paid to enable them to subsist and perpetuate the race without increase or diminution”.
This theory is also known as “Iron Law of Wages”. According to this theory, if the wages fall below the subsistence level, the number of workers would decrease as many of them would die of hunger, disease, malnutrition.
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This would make the wage rates go up as labour will become scarce. However, if the workers are paid more than the subsistence wages, they would marry and procreate. This would increase their number and bring down the rate of wages.
2. Wage Fund Theory:
This theory was propounded by Adam Smith. According to him, wages are paid out of a pre-determined fund of wealth. If the fund was large, wages would be high; if it was small, wages would be reduced to the subsistence level.
3. The Surplus Value Theory:
This theory was propounded by Karl Marx. According to Marx, the price of any product was determined by the labour time needed for producing it.
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The labour was not paid in proportion to the time spent on work but subsistence wages which is much less and the surplus went to the capitalist.
5. Marginal Productivity Theory:
This theory was propounded by Henry Wicksteed and John Clark. According to this theory, workers are paid what they are economically worth.
As long as each additional worker contributes more to the total value than the cost in wages, the employer will continue to hire workers. The employer will stop hiring when it becomes uneconomical for him to do so.