Q.Explain the subsistence theory, the wage-fund theory, and the bargaining theory of wages.

These three theories offer three very different explanations of what pins down the wage rate.

Subsistence theory (Iron Law of Wages). Associated with David Ricardo and restated by Ferdinand Lassalle, this theory argues that in the long run competitive wages settle at the bare level needed for workers to survive and reproduce the labour force. If wages rise above subsistence, better living conditions raise population and labour supply, and the resulting competition among workers pushes wages back down; if wages fall below subsistence, malnutrition and mortality shrink the labour force, making labour scarcer and pushing wages back up. Wages thus keep gravitating toward a subsistence equilibrium. The theory is criticised for its rigid, almost mechanical population link, and for ignoring trade unions, technological progress, and welfare legislation, all of which have let real wages rise well above bare subsistence in most modern economies.

Wage-fund theory. John Stuart Mill argued that at any moment the economy holds a fixed stock of circulating capital -- the wage fund, built up from past savings and set aside specifically to pay labour. The average wage is this fund divided by the number of workers:

Wages can rise only if the fund grows faster than the workforce, or the workforce shrinks while the fund stays put. Mill himself later moved away from treating the fund as rigidly fixed, and the theory is criticised for assuming a pre-determined fund rather than one that grows with the economy's productive capacity. …

Answers sometimes describe only one theory in depth and merely name the other two -- an essay question asking for …