Wage Fund theory – Wage TheoriesCompensation Management

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Wage Fund theory

• This theory was

developed by Adam

Smith and was further

expounded by J.S.Mill.

Wage Fund theory

• J.S. Mill said that wages

mainly depend upon

demand for and supply

of labour or the

proportion between

population and capital

available.

Wage Fund theory

• The amount of Wages Fund

is fixed. Wages can’t be

increased without

decreasing the number of

workers and vice versa. It is

the Wages Fund which

determines the demand for

labour.

Wage Fund theory

• However, the supply of

labour can’t be changed at a

given time. But if the supply

of labour increases along

with increase in population,

the average wages will go

down.

Wage Fund theory

• Therefore in order to

increase the average wages,

firstly, the Wages Fund

should be enlarged,

secondly, the number of

workers asking tor

employment should be

reduced.

Wage Fund theory

• This theory is criticized on

the following grounds:

– (a) This theory does not

explain differences in wages at

different levels and in

different regions.

– (b) It is not clear from where

the Wages Fund will come.

Wage Fund theory

• This theory is criticized on

the following grounds: – (c) No emphasis has been

given to the efficiency of workers and productive capacity of firms.

– (d) This theory is unscientific as Wages Fund is created first and wages are determined later on. But in practice, the reverse is true.