WAGES

WHAT ARE WAGES???

TYPES OF WAGES….

Nominal wages / money wages

Real wages

REAL WAGES W= WM/P X 100

W= Real wages . WM= money wages. P= Price index

FACTOR DETERMINING THE REAL WAGES1) Money wages2) Price level3) Supplementary income 4) Nature of employment5) Hours of work 6) Working conditions7) Trade expenses8) Period and cost of training 9) Employment of dependents10) Prospect of future promotion 11) Social status

THEORIES OF WAGES DETERMINATION Subsistence theory of wages Standard of living theory of wages The wages fund theory The residual claimant theory of wages the discounted marginal productivity

theory of wages Marginal productivity theory of wages Modern theory of wages

MARGINAL PRODUCTIVITY THEORY OF WAGESMarginal productivity of labour refers to

change in total revenue by putting one more labourer, keeping all the other factors costant.

ASSUMPTIONS1. 1.All labourers are homogeneous2. Full employment3.Perfectly mobile.4.Perfect competition.5.Law of diminishing returns operates(I.e.

increase in supply of variable FOP increases TP at diminishing rate.

6.Applies in the long run

STATEMENT OF THEORYTwo approaches to analyse marginal productivity

theory of wages : Analysis from the point of view of an industry Analysis from the point of view of a firm

ANALYSIS FROM THE POINT OF VIEW OF AN INDUSTRY

•OX= labour•OY= wages/MRP

•MW=AW •DD= MARGINAL PRODUCTIVITY CURVE

•SS= supply of labour •OS= fixed•E= equilibrium wages•OW=ES=MRP

ANALYSIS FROM THE POINT OF VIEW OF A FIRM

Short period Long period

SHORT PERIOD ARP>AW ARP=AW ARP<AW

MAR=ARP=AW=MW

LONG PERIOD

CRITICISM OF THE THEORY

•Unrealistic assumption of perfect competition.•One side•Theoretical concept•Difficulty in measuring marginal productivity •Impractical•Less employment more wages•It ignores the influence of other factors on productivity•Static condition

MODERN OR DEMAND AND SUPPLY THEORY OF WAGE DETERMINATION DEMAND OF LADOUR• Demand of commodities• Price of other factors of production

SUPPLY OF LABOUR• Substitution effect• Income effect

WAGES DETERMINATION UNDER PERFECT COMPETITION Short period long period

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