Wage Determination Theory of Classical Economists

Classical economists, including Adam Smith and David Ricardo, proposed a theory of wage determination that they believed applied to labor markets and the economy as a whole. According to classical economics, wages are determined by the forces of supply and demand in the labor market. That is, if the supply of labor is greater than the demand, wages will decrease. On the other hand, if the demand for labor is greater than the supply, then wages will increase.

The classical economists recognized that all wages are not equal, and this theory of wage determination takes that into account. According to the theory, wages are highest in sectors of the economy where there is a higher demand for labor, and wages are lower in sectors where there is a lower demand for labor.

For example, sectors of the economy that require highly skilled labor, such as those in the legal, medical, and technology fields, usually have higher wages. This is because certain skills and experience are necessary in these professions, and therefore, employers must pay their workers more to compensate them for the skills and experience that they bring to the job.

On the other hand, sectors of the economy that require less education and training, such as those in the retail and food service industries, typically have lower wages. This is because less education and training is necessary in these professions, and therefore, employers do not need to offer their workers high wages in order to attract them and compete with other employers.

The theory of wage determination proposed by the classical economists takes into account the fact that wages are not equal across all sectors of the economy. However, the theory does not take into account the effect of non-market factors, such as government policies or unionization, on wages. In addition, the theory fails to address the impact of technological advances and global competition on wages.

In today’s increasingly complex economy, other factors must be taken into account when discussing wage determination. Nevertheless, the theory proposed by the classical economists has been foundational to the field of economics, and it is still important to understand when discussing wage determination.

The theory of wage determination was developed by classical economists such as Adam Smith, David Ricardo and Karl Marx. This theory states that the amount of wages a laborer can receive is determined by the amount of labor they are able to supply to the market. According to the classical economists, wages are determined by the interaction between supply and demand in the job market. An employer will be willing to pay only so much for a workers labor, regardless of the labors worth. The higher the demand for labor of a particular type and the shorter the supply, the higher the wages.

The classical economists argued that wages are determined by the supply and demand for labor. If the demand for certain labor is high, then employers will be willing to pay higher wages to get the best employees. If the supply of labor is high, then wages will remain low as employers have many employees to choose from. They argue that such competition for labor will result in a “natural” wage rate, which will be determined by the amount of wages employers are willing to pay, as well as the amount of wages that workers are likely to accept. The natural wage rate is the equilibrium between what employers pay and what is acceptable to laborers.

Marxists viewed the theory of wage determination as an example of exploitation. They argued that employers were able to pay workers low wages which were not commensurate with the value of the work they produced. They believed that wages should be determined by the value of the labor the worker produces, not by market conditions.