Bcom 1st Year Modern Theory of Wage Determination


Bcom 1st Year Modern Theory of Wage Determination

Modern theory of wage fixation 

According to modern economists, the value of labor is also determined by the demand for and supply of labor like other goods. In short, according to this theory, wages in an industry are determined at the point where the aggregate demand line of workers and their total supply line intersect. This theory can be studied under the following two circumstances: 

I. Under full competition,

II. Under incomplete competition.

(I) Under Perfect Competition 

1. Demand of Labor –

Labor is demanded by producers. Labor is demanded because workers produce, hence labor. The price of demand depends on how much it produces. No producer wants to pay more than the marginal productivity of labor. Thus the marginal productivity of labor determines the maximum wage. In relation to the demand for labor, the following labor quantity is noted. 

(i) The marginal productivity of labor sets the maximum wage. 

(ii) The demand for labor is expressed by the conditions of production, the demand for the goods created by labor and the possibility of substitution between other means of origin. 

(iii) In the short run, the demand of a firm is according to the law of demand, that the lower the rate of wages, the higher the demand of workers for production. 

The demand-curve of the labor of an industry goes down from left to right. this . This states that if the rate of wages is high, then the demand of workers will be less and the demand of workers will be higher if the rate of wages is low. 

2. Supply of labor

Labor is replenished by workers, meaning the worker is a labor-seller. The fulfillment of labor refers to the hours and days of a particular type of labor that is presented for employment at different wage rates. Generally more workers at higher wages and fewer workers at lower wages are ready to work.

The minimum wage of workers is determined by their marginal sacrifice, ie standard of living. In other words, the worker must seek at least such wages in exchange for his work, which is sufficient to meet the social needs of his class. Thus the marginal sacrifice of workers or their standard of living determines their minimum wage. 

The factors which affect the supply of labor in a particular industry are as follows 

(i) Non-economic Causes –

Although a worker is willing to increase his monetary income, many circumstances prevent him from doing so; 

From current employment to attachment, laziness and home environment. Apart from this, customs, cultural and social conditions and the nature of labor also affect the fulfillment of labor. The supply of labor depends on the size of the population, age distribution, hours of work, intensity of work and skill of workers. .. 

(ii) Economic Causes

Generally, labor supply is higher at higher wage rates. In other words, labor supply in an industry depends on occupational mobility when wage rates are increased. Business mobility depends on the following things –

(a) Wages available in alternative industries 

(b) Comparative importance of benefits in business, job security, pension, bonus etc. 

(c) Transfer cost. 



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