Wages-Fund Theory The short-term version of classical wage theory was the wages-fund theory.

As described by John Stuart Mill, this theory explained the short-term variations in the general wage level in terms of (1) the number of available workers and (2) the size of the wages fund. The wages fund was thought to come from resources accumulated by employers from previous years and allocated by them to buy labor currently. Employers were thought to have a fixed stock of "circulating capital" for the payment of wages. Dividing the labor force (assumed to be the population) into the wages fund determined the wage. The theory erred in assuming that a fixed fund for the payment of wages exists and that it accounts for labor demand. Most workers are paid out of current production. Employers balance labor costs against other costs in determining labor demand. Both employers and workers, however, often talk as if such funds exist and as if they determine the amount of labor services needed. They may also accept the implication of the theory that any gain to one group is a loss to others.

Marginal-productivity theory The generally accepted theory of labor demand is an application of the marginal-productivity theory of the demand for any factor of production. Because the demand for labor is derived from the demand for a product or service, it is almost always employed in combination with other productive factors. A demand schedule for labor is the relationship between a price (wage) and the quantity of labor needed. Demand alone does not determine the wage except where the supply schedule is perfectly vertical (inelastic), a very unusual situation. Demand has no effect on the wage where the supply curve is perfectly flat (elastic), but it does determine employment. In all other cases, wages and employment are jointly determined by supply and demand. Quantity of labor demand may be expressed in working hours if it is assumed that wages represent the total costs of employment and that labor productivity is independent of the length

of the workweek. Demand for labor in competitive markets is derived from a production function representing, for an unchanging technology, all possible combinations of labor and capital inputs. Selecting a particular production function, to produce maximum output at some fixed level of capital inputs, produces the short-run marginal (additional) product schedule of labor (see figure below).

The labor theories of value (LTV) are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics. Marginal utility modified labor theories of value in mainstream economics by adding the concepts of marginality (the tendency of the consumer to substitute one product for another in the marketplace and for producers to substitute one commodity for another in the production of goods and services) and diminishing utility to the original labor theory. Thus, under marginal utility, the first unit of production of a good or service yields more than the second or subsequent units but still costs an amount of socially necessary labor determined by marginal productivity of labor. This may cause a reduction of the price of the subsequent units, but the units continue to reflect the total value ( i.e. the socially necessary labor applied at the prevailing level of labor productivity) that was used to produce the subsequent units.

Collective Bargaining. Developing formal models of the collective bargaining process has been difficult. In most situations the parties are forced to deal with each other on terms both parties accept. Neither party is dealing with a set of fixed parameters: prices may be raised or employment may be cut, for example. In collective bargaining, there are always pressures from other sources, such as the public. Also, the bargaining involves many variables, only some of which may be quantified.

A formal bargaining theory applicable to wages has been developed. Its central proposition is that each party compares its probable gain from a strike with the expected costs. The present value of the expected gains over the contract period is compared with the expected costs. Unfortunately, the expected gains and costs cannot be known in advance. Also, a matter of principle or equity is sometimes involved. During a strike, a combination of rising costs and improved information brings the parties closer together and eventually produces a settlement. The cost of a strike to a union is higher when business is bad; the cost to management is higher when business is good.

The Purchasing power Theory of wages concerns the relationship between wages and employment and the business cycle. It is not a theory of wage determination but rather a theory of the influence spending has (through consumption and investment).

Modern economist opines that the price or remuneration of labour i.e. wage is determined by interaction of forces of demand and supply. Wage is determined at the point where demand for and supply of labour are equal to each other. This is why the modern theory is known as supply and demand theory of wages, Demand for labour: Demand for the laborer is derived demand. Factors of production are demanded because they have productivity or efficiency. Productivity of a factor refers to the addition made by it total productivity. Demand for laborers depends on the demand for the goods they produce. The demand for a factor is affected the prices of other factors. Laborers can be substituted for other factors of production. Technical factors also affect the demand for labour. When old techniques are applied there will be more demand for labour. With the introduction of new technique of production the demand for labour declines. Besides the technique production and the prices of other goods, there is a main factor earning the demand for workers is their marginal productivity, original productivity is stated in money forms. Stated in money s it is called marginal revenue productivity. Workers are demanded up to the point where their marginal revenue productivity also labors wage. Therefore an entrepreneur employs labor up to the part where their wages are equal to their marginal activity. With the increasing number of laborers the marginal activity will go on diminishing. Thus the demand curve for labour is downward sloping, Supply of labour:

Supply of labour means the number of workers ready to at the existing wage rate. Unlike the supply of other goods, the supply of labour can not be increased with the rise in their demand. Under perfect competition, the supply curve of a firm is perfectly elastic. A firm can not influence price. It accepts market price as the given datum. Thus the demand of an individual firm for laborer cannot affect price (wage). On the other hand the supply curve of an industry slopes upward from left to right. This means that an industry can get more laborers at higher wages. An upward rising supply curve of an industry shows the more of workers are employed at higher wages. Determination of the Equilibrium wage level: Wage rate is determined by the supply of and demand for labour. Equilibrium wage state is said be determined at the point where supply and demand are equal. At point F demand curve DD and supply curve SS cut each other. OP is the equilibrium wage rate. When demand rises from DD to D1D1 the new equilibrium is restored at point E and wage rate fixed is OQ1 Increase in demand leads to rise in wage. When demand curve shifts to the position D2D2 wage falls from OP to OP2. OP is the ruling market wage. On the basis of the price OP a firm can earn super normal profit, normal profit, or suffers losses from employment labour.