Wage fund theory (Adam Smith)

 THE WAGE FUND THEORY

 

 

Wages and salaries are the price that is paid to the human labour for their physical or skill full efforts performed by them. There are many theories that have been conducted for us to understand the allocation of wages and salaries to the human labour.These theories help us to make sure that right amount is paid for the right amount of work done by human labour. There are various factors that depend for salaries and wages such time, job and efforts  and so on. The contemporary theories would not have come to picture if the modern business economy had not come into picture

 

 

 

https://notesxiinp.blogspot.com/2019/03/economices-notes-12.html

Out of many theories that have come into existence one of the famous theory is the wage fund theory give by Adam Smith(1723-1790) which later was then developed by J.S.Mills. The basic understanding of theory is that in a firm there is a particular allocated amount that is kept aside by the firm to pay it’s workers. The kept aside amount is known as wage fund. The totalwage fund is divided by the number of workers working in the firm and all the workers are paid accordingly and equally. Which makes it very clear the more the number of workers lesser will be the salary for one worker and vice versa. Adam Smith was not able to provide a definitive theory but was able to anticipate other theories . He was never able to precisely give clarity to the theory but was on the right path  

 

 

 

  

https://tyrocity.com/topic/wage-fund-theory-of-wage/

 

According to Adam the wages of workers were directly linked to amount of wage fund a firm has. He has this idea that demand for the workers could not increase until there is increase in the wealth fund of the  firm.

 

 

Pros :-

1. There was a clear idea of how much is to be paid to each worker 

2. All the workers were paid equally that removed discrimination 

3. It also helped the company to maintain a systematic record of the wage funds

4. The system of wages distribution tend to improve 

5. It was quick and easy process

 

Cons:-

1. Some economist challenged the idea of wealth fund and its existence 

2. Theory couldn’t explain the difference of wages for workers

3. The theory also decreased the efficiency of labour 

4. The theory was not able to explain how trade unions can have higher wages for its workers 

5. It is believed to be an imaginary concept that exists nowhere

6. The theory considered demand side of market not the supply side

 

 

https://commons.wikimedia.org/wiki/File:Diagram_of_Wages-Fund_Theory,_1885.png

 

 

 

The wage theory was not successful even though having all the advantages as it was easy method for the owners to divide the wages and was also a quick process even after having so many advantages the theory did not succeed as it already had many disadvantages with it for example a man working for 2 hours a day had same amount salary as a man working 10 hours a day that was a a u fair practice to be followed plus also all the assumptions made by the theory was not right like labour isn’t homogeneous or money isn’t the only medium of of exchange and so on (all the assumptions of theory were proven wrong)

 

 

If I talk about my opioid on the theory I think wage fund theory would only be useful in small industries where all the labour have similar kind of work and same time is invested by them in the work. But in case of other industries, if they have to grow they need to follow other methods and have a salary distinction according to the work performed by each person. This will also motivate the employees and help the company to grow. Any method that is implemented should have a clear understanding of the the things are gonna work that is how a firm will prosper in future.