Economics

Wage Fund Theory of Wages And Its Criticism

The Wage Fund theory was putforth by Adamsmith. Later this theory was developed by J. S. Mill. According to this theory, there is a wage fund in every country. This fund is of a fixed size. The wages to the workers are paid out of this fund. The average wage can be calculated by dividing the wage fund by the number of workers.

Wage rate = Wage fund / No. of workers

Since the wage fund is fixed, the average wage is determined by the number o f workers in the country. Since the wage fund is fixed, the only way to increase the wage level of the workers is to reduce the number of workers. Trade Unions will not be able to raise the wages of labourers. If they succeeded in securing higher wages for labourers in one industry, labourers in other industries would suffer and get lower wages. So trade unions cannot rise wages of workers when the Wage Fund is fixed.

Criticism of Wage Fund Theory of wages:

This theory has been criticised on the following grounds

Wage fund do not exist : Some economists had challenged the concept of Wage fund. According to them, the wage fund exists no where. It is only an imaginary concept of classical economists.

2. Wage differences: This theory does not explain why there are differences in wages.

3. Trade unions : This theory does not explain how trade unions can secure high wages for its workers without any loss to tip workers in other industries.

4. Incomplete theory: According to some economists, this theory is partial and incomplete. It explains wages from the demand side only. It does not take into account the supply side of labour.

5. Unrealistic: According to this theory, if the wages of the workers in one industry increase, the wages of the workers in other industries will decline because the size of the wage fund is fixed. But this is totally wrong and contrary to facts.

6. Wage fund depends on wage rate: According to some economists, the wages are not determined by the wage fund, but the wage fund itself is determined by the wage level.

7. Ignores the efficiency: This theory ignores the efficiency of labourers. Efficiency of labour increases national income. Then the workers can secure higher wages.

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