EVERYTHING YOU NEED TO KNOW ABOUT “THE WAGE FUND THEORY”

INTRODUCTION

A wage is a payment that is usually paid for the services offered by the workers. Wages are usually paid according to a contract or on the basis of hour, day or on the piece work basis. It is very important that every worker is rightly and equally paid for the work done by them. This where the theories of wages play an important role in determining the wages and the share of contribution made by the labour force.

THE WAGE FUND THEORY

Wage fund theory was proposed by the Scottish economist, Adam Smith. Further this theory was explored and advanced by John Stuart Mill (J.S. Mill). This theory was developed on an assumption that a certain part of capital is kept aside only for the purpose of wage payment. This amount of capital that is reserved for the payment of wages is known as wage fund.

The wage fund is predetermined or fixed. Smith stated that the demand for labour could not increase without the increase of the funds that is reserved for the payment of wages. Basically the wages cannot be increased without decreasing the number of workers and vice versa. It is the wage fund that actually determines the demand for labour.



J.S. Mill also stated that, wage was a variable dependent on the relation between the laboring population and the aggregate funds that is set aside by the capitalists to pay them.

Mathematically the wage level is determined as the following:


Pros:

  1.   This theory tried in removing the concept of discrimination, as all the workers were paid equally.
  2.   The wages were fixed to all the employees beforehand.
  3.  The wage distribution process was also made easy.

 

Criticisms:

  1. The wage fund theory has failed to provide emphasis on the efficiency of workers and the productive capacity of the firm. Ignoring the efficiency of the workers, will decrease their productiveness and thus there will be a decrease in the contribution towards the national income.
  2.  It is argued that this particular theory is unscientific. The reason is, this theory decides the wage fund first and then determine the wages. But in reality it is the vice versa. The wages has to be determined first and then the wage fund has to be decided.
  3. The wage fund's view has been criticized by the trade unions for thinking that salaries cannot be increased through negotiations.
  4.  This theory has failed to explain the differences in the wage rate.
  5.  The wage fund theory believes that the wages are paid out of capital. But if the production process is short, wages will have to be paid out of current production. When the production process is long, then the wages will be paid out of the capital.
  6.  This theory was seen as a major attack on the trade unions. This is because the trade unions do not have any or little control over the population in the industry, thus it is impossible for them to raise wages without reducing the number of workers.
How is the wage fund theory suitable for the Indian economy?
The wage fund theory was accepted by many economists like J.S Mill and Nassau William Senior for 5o years. In later years, it was discredited by others, who argued that the demand for labour was not determined by the wage fund, but by the consumers’ demand for the products.
When it comes to our Indian economy, 6% of Indians still live on less than Rs. 230 per day. This is definitely accompanied by inequality in terms of income as well as wealth. With the drastic increase in the Indian population, which in turn has increased the demand for basic necessities, the wages would be driven to the subsistence level. This theory was unable to prove the existence of any kind of fund that maintained the fixed or the predetermined relationship with capital. The wage fund theory has many issues, such as this theory ignores the quality aspect of a worker. That is it quality of workers have been traded off with just the effectiveness but not with efficiency. Since it ignores the efficiency or the quality of work done by the workers, the employees feel demotivated and would refrain themselves from producing more. For example, even if man worked for 8 hours in a day, he would be paid the same amount of wages that is paid to a man who worked just for 3 hours in a day. Hence we can see that this theory did not consider the efficiency of workers and the assumption that all the labours are homogeneous was proved wrong. Therefore this theory is not relatable or suitable to Indian economy.

Conclusion:

The wage fund theory propose various inputs about the wage distribution. Even though this theory had lot of the advantages, it was not effective. Irrespective of these criticisms,
the wage fund theory was influential only till the end of 19th century

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