Economics

Residual Claimant Theory of Wages And Its Limitations

This theory was put-forth by the American economist Francis A.Walker. According to this theory, wages are the residue left over after the other factors of production have been paid their remuneration, whatever us left over after making payment to other factors constitutes wages.  Thus, wages are equal to the total income minus rent, interest and profits.

According to this theory if the worker works hard and increase the total production, there is every possibility of their wages going up with the passage of time. Therefore, the theory is quite optimistic than earlier theories.

Criticism of Residual Claimant Theory of Wages:

1. It is not the worker who is the residual claimant but the entrepreneur.

2. This theory failed to explain how trade unions are able to raise wages.

3. It ignores the influence of supply of labour in the determination of wage rate.

4. This theory tells that profits, intent, and rent do not increase  even at times of increased production. When production increases, these three rewards also increase.

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