Wage fund theory of wages

The wage-fund theory of wages:-

The wage-fund theory was first suggested by Adam Smith but the entire credit for formulating the theory goes to J. S. Mill. He has formulated this theory in his famous book “Principles of Political Economics” published in 1848 A. D. The wage-fund theory is regarded as a complementary rather than substitute to subsistence theory of wage.

                  According to this theory, wages depend upon the relationship between the supply of population and the capital available to employee workers. The population refers to the number of laboring classes and the capital refers to the number of funds to be used for the payment of wages. Thus, the available funds for wages are fixed at any given time which is called wage fund and the only way to increase wages is to reduce the numbers of laborers to be paid.

                 Level of wage = Wage paid/ Number of workers.

                        The wage-fund theory has the following assumptions:-
  • Capital is fixed and it is built from the saving of the previous period.
  • Wage fund is rose before the employment of workers.
  • The level of wage is fixed after the employment of a worker.
  • The units of labor are homogeneous.
  • Workers are paid equal wages.
  • The wage level is flexible to the change in the number of workers employed.
  • Money works only as a medium of exchange.
  • There exists a direct relationship between the level of wage and wage fund an inverse relationship between the level of wage and the number of workers.
The determination of wage level under the wage-fund theory of wages can be explained with the help of the following schedule and diagram:-

Wage fund (Rs.)
Number of workers
Level of wage

The above table and diagram show the inverse relationship between the number of workers employed and the level of wage, keeping the wage fund constant. The number of workers and the level of wages are measured along Y-axis and X-axis respectively. The curve shows that, as the number of workers increases, the wage level decreases and vice versa.

Criticisms of the wage-fund theory of wages:-

1. Fails to explain the difference in wage:-
According to this theory, all the workers get the same level of wages. But in reality, the wage paid to workers differs from person to person, a place to place, occupation to occupation, and time to time.

2. The wrong assumption of a homogeneous unit of labor:-
Units of labor are not homogeneous as assumed by this theory. They differ in skill, knowledge, education, strength, productivity, etc.

3. Neglects efficiency and productivity of labors:-
This theory has neglected the efficiency and productivity of laborers in determining the wage rate. A higher wage should be provided to efficient workers and lower to the inefficient.

4. Wage fund is not raised before employing the workers:-
According to this theory, the wage fund is raised before employing the workers. However, it is raised on the basis of workers employed.

5. Money is not only the medium of exchange:-
This theory has taken money only as a medium of exchange. But, money has effects on production, employment, investment, etc.

6. Unable to explain the source of wage fund:-
This theory does not explain how the wage fund arises and why it remains fixed. It only states that the wage rate is found by dividing the given wage fund by the number of workers.

7. Wrong concept of permanent wage fund:-
This theory takes the wage fund to be permanent. But, with the increase in the price level, the wage rate should also be increased.

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