The article is written by Vishruti Chauhan pursuing BA LLB from Symbiosis Law School, Hyderabad. The present article focuses on the concept of wages and productivity and analyses various theories of wages and their impact on the industries. 


The economic stature has been through various theories before it could become what it is now. Theories play a very important part as they realise again and again what all has been analysed until now and what were the reasons that a particular theory is not followed in the present. Wages and productivity are a very basic and crucial part of Economics. They provide the very core structure of economic policies and a framework for establishing economic stability. There have been different theories regarding the relation between wages and productivity and their impact on the industries. With the change in time, the theories have evolved and have taken a form of more stabilised nature than others.         


Wages are understood as monetary payment for any service or labour. Under Indian law, wages are defined in The Minimum Wages Act, 1948. Section 2 (4) of the Act defines wages as ‘all remuneration which is made by monetary mode for a work done under an employment’. This Section provides for certain exceptions as well such as wages won’t include household supplies, travelling allowances, the contribution made to PPF etc. The wages are determined by the demand and supply in the market for labour like other prices.

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Productivity is defined as a mode to measure the efficiency of the products that have been used and the output they are giving in the economy. It is the ratio of the output volume to the input volume of the unit. It is regarded as very important in establishing economic growth and competitiveness in the economy of the country. The utilisation of the input processes and assuring that the output received is maximum determines the productivity of the unit.     

Theories of Wages

Subsistence Theory of Wages

This theory is also known as the Iron Law of Wages or the Brazen law of Wages. First, formulated by the Physiocrats, it was later developed by a German economist Lasalle. The father of Economics Adam Smith has also mentioned such theory in his book ‘The Wealth of Nations’, where he states that wages which are to be paid to workers should be enough so that they can live and support their family. David Ricardo is considered as one of the best exponents of this theory and his contributions helped in developing this theory. Under the Theory of Exploitation, Karl Marx also made it as a basis. The theory states that wages that are provided to a labourer should be a payment that is just sufficient to satisfy the necessities of life. It determines that there is a subsistence level of payment which should be followed and the wages should be given according to the same, without exceeding such limit. It was held by its proponents that in a case where the wages are lower than the given subsistence level, there will be a fall in labour supply due to decline in population and it will lead to a rise in wages which will also lead to a decline in supply. Moreover, if the wages are higher than the subsistence level, the labour supply will increase which eventually will lead to lower wages. Thus, this theory stressed upon the maintenance of a subsistence level so that wages remain fixed at such a level and there is no eventual situation of higher or lower wages. David Ricardo explains two assumptions which have been taken in this theory- fist is that the food production is subject to the Law of Diminishing Returns and second that population increases at a faster rate. 

However, this theory could not hold any stand in a practical sense. There were many loopholes in this theory which made it nearly impossible to acknowledge for a longer period of time. In the industrial sector of a country, there are not just one but many types of employment and thus even the wages deem to be different for such different employments. This theory does not consider the same and is based on uniformity of wages all over the industry which is not practical. Criticism has also been laid down that this theory only takes into consideration the supply of the market and ignores the demand which is crucial because supply depends on demand in a market and even in case of wages, the demand can make a huge difference in the supply. This theory is also criticised because it is based purely on the Malthusian Theory of Population which does not really apply every time. An assumption has been taken that the increase in wages will result in an increase in the population of the country, which might not be true for many developed countries. In developed countries such a rise in wages results in an increase in the standard of living and thus this theory does not apply in every situation. Furthermore, it is also criticised that this theory only holds true for a long period of time, but does not give any particulars or results in a short time or in a year. This makes it difficult to analyse the theory especially on an industrial level, where such calculations become very important. of living Theory of Wages

It came in the late 19th century and refined the Subsistence Theory of Wages. It related the wages of the workers to the standard of living and stated that wages should be determined by the standard of living of the workers and not by the subsistence margin. This theory seemed to have refined the previous theory, but it holds no good, as the dependency on the standard of living could vary from person to person and it could not be regarded as a strong grid to measure wages. It also focussed only on the supply part and did not consider the demand in the market. The Standard of living of a worker could change from time to time and moreover, this theory was impractical and very indirect because the workers could not get high wages just because they had a high standard of living. The output in productivity should also be there to increase such wages.    

Wage Fund Theory of Wages

This theory’s biggest criticism came from the Trade Unions in the industries. Alongside the theories of Adam Smith and David Ricardo, J.S. Mill propounded this theory. This theory stated that Wages are depended upon the proportion between the population and the capital. A part of the capital is kept aside for the sole purpose of wages and the determinant is the population to calculate the wages. Population under this theory means the labourers or working class and the theorists asserted that competition in the market is affected by these two factors- capital and population. Under this theory, the capital which was called the wage-fund was kept constant as it was stated that if the wage fund is used for wages given to workers it would affect the decrease in the capital of production equipment or goods and ultimately decrease in wages as well. Thus, wages-fund is kept constant, and so, if the wages are to be increased it results in a decline in population and if the population is increased, then the wages will decrease. There is an inverse relationship between the two. The theory is given a mathematical dimension- “Wages= Wage fund/ population”. 

This theory was seen as an attack and dysfunctioning of the trade union in the industries. As trade unions do not have any control over the population in the industry, it is impossible for them to raise wages without reducing the number of workers. Thus, it binds them under the decision of the Industry which was a huge blow to the whole purpose of a trade union. This is not the only issue with this theory. The wages-fund, which is supposed to remain constant, is not defined under this theory. And thus, what constitutes the whole capital is not defined. Further, the quality of workers has been compromised, as it takes a relation between wages and population without realising that the quality of workers as well the quality of work can get affected if wages are raised. It also assumed that wages can only increase if there are profits, however, in the case of increasing returns, both wages and profits will increase. This theory took supply and demand in its ambit but it has failed in determining the wage rate and thus compromising the freedom and bargaining power of trade unions.         

Surplus- Value Theory of Wages

Karl Marx propounded this theory. He deviated from the Subsistence Theory of Wages and stated that the wages are drawn to a subsistence level not because of the population but because of the unemployed labourers. He stated that for capitalists, the workers are a mere instrument in gaining capital, and in case, where a labourer is working for extra productivity, there is a surplus-value that is generated and it adds to the capital of the industry which goes back to the owner. Marx in his theory has attacked the capitalists and he has drawn the negative aspects of industries which derives the workers to work more than they are paid for. It states a situation where even overtime is not paid to the workers and the extra productivity is used by the owners of such industry to increase their capital.      

Bargaining Theory of Wages

This theory explains that wages depend upon the bargaining power of the workers. John Davidson in his book ‘The Bargain Theory of Wages’ propounded this theory and stated that there are various factors which influence the wages in a bargain of the workers and producers. Under this theory, the more the worker is able to work, the more he gets paid. This works in small industries like labour for carrying goods through lorry or other transport or daily wage workers or workers employed for a specific period of time.   

Residual Claimant Theory of Wages

Propounded by Prof. Walker, this theory states that the wages of a worker are equal to the product minus rent, profit and interest. Thus, rent, interest and profits are understood as not a part of wages and after subtracting such determinants from the capital of productivity given the wages should be given to the workers. This theory came with a lot of flaws as there was no way that the wages could be fixed after the production has started as they are fixed before starting the production in an industry. Therefore, in such a case the residual claimant will be the entrepreneur and not the labourer. Furthermore, subtracting profits and rent will not change the fact that the capital of landlords and entrepreneurs are not fixed and thus it is futile to do so. Criticism has been made that this theory ignores the aspect of supply of workers as well as the trade unions.  


Marginal Productivity Theory of Wages 

It is regarded as the most satisfactory theory among all others. Von Thunen first stated this theory and then it was developed by J.B. Clark, Wicksteed and Walrus. The theory states that the wages of a worker are dependent upon the productivity of the worker. It states that as an employer goes on employing labour, according to the Law of Diminishing Marginal Utility, the marginal product will fall and thus the labour is employed up to a level where wages is equal to a marginal level. Prof. S.E. Thomas states that due to the competition that prevails among the labour force, a wage rate is determined which is equal to the marginal product so that the wages provided are up to mark with the employed workers. This theory is most practical and provides that an employer can only employ workers up to a mark where he is able to pay the wages for productivity. Thus, productivity is given importance. Moreover, it is in compliance with the other factors of the market like supply and demand. 

This theory is applied with an assumption that all factors such as the mobility of workers, Perfect Competition, technology are constant. This is one of the factors which derives criticism in this is not homogenous in nature and with the change in circumstances it might not work at all, which makes it practically insufficient. It deals with the marginal productivity which may be affected because of the low wages that are being given.      


There are other different theories as well which provide for various analyses and structure of wages. The Marginal productivity theory has been the closest to a satisfactory theory of wages. It has its own criticism but the feature that it directly relates to the productivity of the worker makes it stand out. The industries have been working quite in the same mechanism in many places, however, it is difficult to achieve the objective due to the challenges mentioned above. But still, in a market, this theory is simpler and provides a better mechanism than the others. There are other theories such as supply and demand theory as well which is purely based on the supply and demand in the market and the employment and wages of the workers according to it.  



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