Gender pay gap in the European Union

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2. WAGE THEORY 
 
2.1. DEFINITION OF WAGE THEORY 
Wage theory refers to the income that is paid to the workers in the labour market. Adam Smith was 
one of the most important exponents with (The wealth of Nation) in 1776. Smith’s reflection on 
wages was that they were produced through offer and demand in the market and that employees are 
self-centred in order to meet their own needs by seeking jobs where labour forces are mostly needed. 
He also discussed on the standard of workers capabilities that was essential for economic growth. 
Economic production can turn into a way to have preferable effect in the economic environment 
and it does not seem to be unreasonable to explain wage as human labour. Talking about wages 
concerning companies and employees do not have the knowledge about workers skills and this 
explains about wage dynamics.  
In a higher prospective, if companies cannot be impartial then the wage will be inflexible, but it may 
not be stiff if employees can choose to have another job that can give them best offer in the 
marketplace, and this will make wages to increase only if there is a difference between the market 
and the present one. 
Wage dynamics tries to determine the relationship between employees and their skills, and to find 
out about how it works, through market image and acquisition. Becker and Mincer generated the 
model of human capital joint to an empiric assay. This is to show how incomes rises with a 
professional experience, and it can be determined only by the theory based on efficiency.
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We can also calculate a present worker’s wage by subtracting his main wage to his years of age and 
his efficiency and secondly, we have even an inflexible wage, that does not increase with age and 
efficiency. Wages do not differ from people’s devotion to the marketplace, because it must be the 
following dedication to labour force: 
a. People see labour as a particular factor 
b. There is a minimal boundary between struggles and profits 
c. It is not appropriate for a benchmark and an extent in terms of wage 
There are different types of wage theories which are the following:  
 
1. Just Price Theory 
This theory was determined by Plato and Aristotle, they assume that every human being will be 
predesignated in order to have the same life conditions of their household’s life progression, but the 
community should allow them to progress by given them enough remuneration in order to be able 
to sustain a better lifestyle. 
1. Subsistence Theory 
The major exponent of the theory was David Ricardo, and it is also known as the iron law of wages. 
Ricardo determines that employees must be remunerated in order to survive, sustain mankind with 
the intention of avoiding any kind of fluctuation. 
When there is a weak wage it reduces man force because of famine and decease, meanwhile if there 
is a rise in wages it brings a better lifestyle for human race. But this theory has some weaknesses 
and they are 4 in number, which are the following: 
•  The rapport between wedlock and wages: it does not seem right to determine that when 
there is a raise up of salary to a subsistence level, it means that the person can get married 
by increasing natality. And in the other way, when there is a raise up of salary, people tend 
to boost up their lifestyles. 
• Ignored Demand-side: it values more the supply part and not the demanding part regarding 
the labour market. 
• The difference in wages: it does not clarify the reason why wages vary from job to job and 
from individuals. 
• Ignored Trade unions: it does not take into consideration the importance of the unions, but 
recently they have a major part in wages determination.
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2. Wage Fund Theory 
The economist Adam Smith determined this theory, he explained that the wage level procedure 
produces excess money for the firm and if the endowment is significant then the wage will be the 
same too. This theory concentrates on firms and its ability to remunerate. The theory has its own 
weaknesses such as: 
• The difference in wages: there are no differences in wages because all jobs are paid 
fairly, and wages are different among individuals. 
• The demand factor ignored: labour force supply is more essential than demand. 
• Existence of fund: there is an existence of distinct amount of money that are used 
for salaries, but sincerely speaking there is not such that can demonstrate that. 
• Objection on homogeneous labour: labour is uniformed in this theory, and it 
assumes that workers must receive payment evenly, but it just seems to be 
impossible. 
3. Surplus Value Theory 
Karl Marx explains this theory, by saying that labour force is considered as a product that is 
meant for trade and he assumes that labour can valorise products. The proprietor will not 
declare the real sum of money received from the client by, using a small amount to pay wages 
to the worker. Marx forecasted the constraint on the society, but it was not the reason why 
there was a herd to wages into subsistence level, but it is caused by a high level of 
inoccupation. Marx determined that the cause of inoccupation was because of capitalist, by 
clarifying to Ricardo that the equivalent of good was resolute by the amount of time of labour 
that is required to form it. In Marx’s belief, labour force was only a tool, in order to trade for 
a job, so that a worker can have a high wage. Nevertheless, he supposed that the firm would 
constraint the employee to work harder in order to have a good salary and the excess rate 
would be held by the firm. But this discussion with the labour theory of value and the 
subsistence theory of wages were rejected. 
5.  Residual Claimant Theory 
 This theory was proposed by Francis Walker, he assumed that there are 4 elements that brings a 
surplus to goods and they are land, labour, capital and entrepreneurship. The earnings from goods 
was apportioned between the 3 elements, just like a remuneration that is contrary to their input. The 
residual part was given to workers as salary, that is contrary to their value and it is called residual 
claimant.
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The theory has been denounced for some following aspects: 
• Supply influence ignored: it does not consider the impact of supply, when talking about 
wage determination. 
• Role of trade unions: it does not justify the reason of increase of salary. 
• Entrepreneur right: we can say that the residual claimant theory is the right one and not 
labour force and it claims its own part in the manufacturing aspect. 
• Case of loss: if a firm goes through a deficiency, then it will have a negative impact on 
labour too. 
6.  Marginal Productivity Theory 
The exponent of this theory is Phillips Henry Wicksteed and John Bates, they assume that demand 
and supply function defines wages and that the employee are remunerated according to their 
financial pay. The minimal notion is that firms will always hire workers only on a condition that he 
generates surplus value than the worth and this will make the owner to have a higher gain by not 
remunerating the non-minimal employees. 
7. Demand and Supply Theory 
This theory explains the interrelation between supply and demand and the rate of pay is figured 
out identically. The labour supply depends on elements like society, movability of labour and 
social organization. Perhaps, wages will be figured out to where demand and supply meets a break 
point
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8. Bargaining Theory 
The theory is determined by John Davidson, he assumes that the negotiation force of workers is 
figured out by the wage rate. 
9. Behavioural Theory 
Rules, cultures, purposes, kindliness and social tensions have an impact on pay configuration. 
Wages have to gratify worker’s necessity according to Maslow and Herzberg, like health, safety 
and etc. 
10. Investment theory 
This theory was founded by H.M. Gitelman, who presumed that every employee has a bundle of 
assets like background, practicing and skills, in which everyone are committed to in their job 
background. He determined that employee's remuneration is mended through labour ratio and 
employees can restraint their remuneration.
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2.2   FURTHER STUDY ON WAGE THEORY 
    This discussion on wage theory was brought up by Adam Smith through literature but it was 
through the economist Pigou that analytically formed the theory. There is a way of how employees 
and owner's insight the highest and lowest wage rates that allows barriers, but the weakness in this 
discussion is that there is not a solution for this theory. Many have tried to find the best solution, 
but the nearest one was found by Hicks (1963), but it found out to be impossible to demonstrate. 
Another economist was Nash (1950-1953) who found the right solution to this theory with the so-
called game theory, but it does not justify the level of impact on this theory.  
There are 3 different models:  
1. The contract zone of Pigou (1933) with the neoclassic approach  
2. Bargaining power of Chamberlain (1951) with the behavioural approach  
3. Bargaining solution of Nash (1950) with the theoretic game approach  
1  The contract zone of Pigou (1933) with the neoclassic approach  
It refers to minimum and maximum wage rate where the last one establishes itself. Pigou assumes 
that anytime wages are connected to negotiation that means that it has to be defined by the bipartite 
monopolistic theory, but it is not seen as the best concurrent answer and wages should not be defined 
by the demand and supply model. Wages do not equalize demand and supply force, only when both 
parts agree to define a higher and lower wage, but it can reduce the bargaining limits.   
The barrier is the highest wage that trade asks for without any negative depletion and the lowest 
barrier is the lowest wage that owners should give so that they can have many workers.  
This image below is the so called “sticking point” which must be private between union and 
employer and not public to third parties.  
  
  
  
 
1
 Chamberlain, N. W., Collective Bargaining, New York: McGraw-Hill, 1951; 
2
 Nash, J. F., Jr., "The Bargaining Problem," Econometrica, 1950, Vol. 18, pp. 155-162; 
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Pigou, A. C, The Economics of Welfare, London: Macmillan and Co., Ltd., 1933.