Wage fund theory of wage

Wage fund theory of wage
This theory is developed by classical economist named J.S Mill. According to Mill, wage level is determined by wage fund and the number of worker’s employed. To pay the laborer, a wage fund is raised. Once the wage fund id rose, it is kept constant. The wage fund is distributed among the worker’s employed. The workers are assumed to be paid equal amount. It is because the units of labor are homogeneous. If more workers are employed each worker gets fewer amounts and if less number of workers is employed each worker gets more amount of money. The wage level is given by the ratio of wage fund and number of worker’s employed.

Mathematically,

This theory can be explained with the help of table and figure as following:

In the above table, wage fund raised is Rs 1, 00, 00,000. When the number of workers employed is increased from 50000 to 100000 and 150000 the wage level is decreased from Rs 200 to Rs 100 and Rs 66.67 respectively. It is due to constant wage fund distributed among more workers. If we represent wage level with respect to number of workers employed we obtain a convex curve.

In the above figure, the downward sloped convex curve represents inverse relationship between wage level and no of workers employed.

Assumptions

• According to this theory, wage fund is rose before the employment of workers
• The workers are paid equally out of the wage fund
• The units of labor are homogeneous
• The wage level is flexible to the change in number of workers employed
• Money is just a medium of exchange

Criticisms

• Wage fund is not raised before employing the workers but is rather raised on the basis of worker’s employed
• Wage paid to workers differs from place to place, time to time, person to person and organization to organization.
• Units of labor are not homogeneous. They differ in skill, knowledge, strength, education, attitude etc.
• Wage level is not flexible. Wage level fall is opposed by workers and trade unions
• Money is not mere medium of exchange. It has effect on production, investment, employment level etc.