Theories of Wages & Salaries

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From the beginning of industrialization, when the number of potential employees began exceeding their potential employment opportunities, theories regarding the proper wage that employees should earn have been discussed. Some speak to the supply side of the economy, while others focus on the buying power of employees in the market. Others consider wages as a separate concept from production entirely.

Purchasing Power Theory

  • The purchasing power theory focuses on the buying power of employees and their effect on the overall economic environment. It maintains that paying higher wages increases employee investment in the overall market, thereby creating more employment options elsewhere in society. It also focuses on the consumption power of employees and their ability to manipulate the demand for products if they have the individual buying power to increase their consumption.

Subsistence Theory

  • Subsistence theory focuses on the basic needs of employees and states that an individual must make enough income to support her basic needs and the needs of her family, says the Scarlett website. Under this theory an individual who does not make enough to support his basic needs will seek employment elsewhere or be unable and unwilling to continue in his current employment. This theory focuses on the supply side of labor while neglecting the employee’s desire to earn more than his basic needs.

General Theory

  • The general theory of wages states that a decrease to the overall wages of all employees allows employers to hire more employees, thereby creating employment opportunities. This theory ignores the motivational benefits of higher wages and the potential buying power of individuals in nonessential markets. An employee who earns too little is unlikely to spend the money she does not have to purchase luxury items and items of convenience, decreasing corporate motivation to delve into these economic areas. So the focus will be on creating products to meet customer’s basic needs.

Surplus Value Theory

  • Surplus value theory identifies a gap between the production of employees to their wages earned. The theory states that individual employees tend to not earn wages equal to the value of their performed work. This difference is often referred to as the rate of exploitation and indicative of a system that rewards employers for the mistreatment of their employees, says the Scribd website.

The Bargaining Theory

  • The bargaining theory states that the wages paid are equivalent to the bargaining ability of the employees. This theory sets a competitive bargaining environment in companies and suggests that an employee should seek to increase his effective bargaining potential to earn higher wages. This theory became the foundation for collective bargaining systems.

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