Important and Interesting wage theories not covered in contemporary books

1. Wage Theories
Presentation by
RR Mohan Kumar
PGP IInd Year,
Bharathidasan Institute of management

2. General Theory of Wages
• Decrease to the overall wages of employees allows employers to hire
more employees
• Creates Employment Opportunities
• Ignores Motivational benefits of higher wages
• Ignores potential buying power of individuals in nonessential markets

3. Efficiency Wage Theory
Productivity of wages depends positively on their wages
Sub-Models
Shirking Model: Higher wages-Cost of loosing job is higher-Incentive
for workers to not get fired by shirking work
Gift-Exchange Model: Higher wages-Gift from the firm-Workers will
return the gift in the form of higher effort
Fair Wage Effort Model: Paid low wages-perceived as below fair
wages-not as much effort as they got fair wages
Adverse Selection Model: Wage above labor market equilibrium-
Attract more employees-Helps to attract the best talent
Turnover Model: Workers paid higher wages than other firms-less
inclined to quit jobs-firm saves cost of hiring and training new workers

4. Investment Theory-H.M Gitelman
• Workers paid in proportion to their investment in education, experience and
training
• Worker having higher attributes will get higher payments

5. Modern Theories of Wages
• Logical extension of marginal productive theory
• Wage rate is determined by the interaction of the forces of demand for
and supply of labor in given market situations
• Also called “Demand and Supply Theory”
• Demand for labor depends on:
demand for goods
price of complimentary and competitive factors
productivity

6. Implicit Contract Theories of Wage Rigidity
• Workers are risk averse and have limited access to capital markets
• They prefer insurance against fluctuation in their income
• Cannot Obtain wages from insurance companies(Short-comings of the
theory)
• Firms offer wage and employment insurance as part of employment
package
• Those firms can attract workers at Lower wages than firms which do not
offer job insurance

7. THANK YOU