Economic Theories about Wages

Many theories have been advanced to explain the nature of wages. The first of them was the subsistence theory of wages, also called the "iron law of wages," of which David Ricardo was one of the main exponents. The theory maintains that wages cluster around the bare subsistence level of workers. A wage rate much above the subsistence level causes an increase in the number of workers; competition will then lead to a depression of wages back toward the cost of subsistence. Wages that are below subsistence reduce the size of the working population; in that case competition will raise wages, but only up to the subsistence level again.

In the surplus-value theory as propounded by Karl Marx, the value produced by the worker in excess of what is paid in wages is called surplus value. The surplus value, exacted from the worker, constitutes the capitalist's profit. The wage-fund theory is that wages are advanced out of a fixed fund of capital, from which an excess withdrawal, either through legislation or through union pressure, will ultimately reduce the amount available for other workers. Any increase in wages would also have to be taken out of profits, and their reduction would cause a decline in savings, which provide the capital from which the wage fund is derived.

The marginal-productivity theory maintains that employers will only pay a wage that is, at most, equal to the amount of extra value added to the total product by one additional worker. The bargaining theory modifies the marginal-productivity theory by taking into consideration other factors (e.g., laws and social and political changes) that might affect the determination of wage levels and by acknowledging that certain basic assumptions (equal bargaining power of employer and employee, free competition between the two, and mobility of labor) that characterize the marginal-productivity theory do not hold in our present economic system.

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