Theories of wage determination

(a)   Subsistence theory of wages (Iron law of wages). According  to this  theory,  workers  are given  a wage   which   is just   enough   to  enable   them  acquire   the  basic   needs/necessities  for  example housing,  clothes  and food.

(b)    Wage fund theory. According   to this theory, a wage fund is created out of which the wages are paid.   This wage fund is accumulated   from profits realized from production.

(c)   Residual theory of wages. According   to this theory,   the wages   are the residues   (left overs)   after other factors of production   have been rewarded.    The more the left overs, the higher the wage.

(d)   Bargaining theory of wages.   This theory   states that wages   are determined    by the relative strength   of the trade union and the concerned   employer.   To arrive at a given wage   involves negotiations   between the employer and the trade union representatives.

(e)   Market theory (Modern theory) of wages. According   to this theory, wages are determined   by the market   forces   of demand   and supply   for labour   in the labour   market.     If there   exists excessive supply of labour in the market, wages fall and if there is excessive   demand for labour, wages increase.

(f)   Marginal productivity  theory of wages (labour).This  states  that  labour  should  be paid  a wage which  is equal  to the value  of its marginal  product,  that  is, the value  of additional   unit  of output produced  by extra unit  of labour  employed.

Value of marginal product of labour = Marginal product of labour x price of output (MPL  X P)

Wage   = Value of marginal product of labour (V.M.P_L)

= marginal revenue product  of labour (MRP_L)

Assumptions   of the Marginal productivity    theory of wages (labour)

1. Perfect competition   in the labour market.
2. Homogenous   units of labour employed.
3. There is no government intervention   in the labour market.
4. Employers know the marginal product of their workers
5. Labour can measure its marginal product.
6. Labour is perfectly mobile
7. There is equal bargaining power between the employer and the employees.
8. It assumes the law of diminishing   returns in the production   process.
9. It assumes existence of excess capacity in the production process.