Wage is one of the most important concepts in labor economics, and it appears repeatedly in agricultural production, farm management, and veterinary labor decisions. Whether you are studying crop economics, livestock production, or farm budgeting, understanding wage helps you make sense of labor costs and productivity.
At its core, wage is the price paid to labor for the services they provide in the production process. But wages can take many forms, and different theories explain how they are determined. This lesson breaks everything down into simple, clear ideas so even first-time learners can understand them easily.
What Is Wage?
Wage is the payment made to a laborer for their contribution to production. It is the laborer’s income from work, whether the task is weeding a field, operating a tractor, or managing animals.
Types of Wages with Simple Examples
1. Piece Wage
Payment based on the amount of work done.
Example: Wage for weeding one acre of a paddy field.
2. Time Wage
Payment based on the amount of time worked.
Example: Wage paid per worker per day for weeding.
Money Wage vs Real Wage
Money Wage (Nominal Wage)
The wage paid in terms of money.
Example: Rs. 700 per day.
Real Wage
What the money wage can actually buy—the worker’s purchasing power.
It includes the necessaries, comforts, and luxuries workers can afford.
A labourer’s standard of living depends on their real wage, not their money wage.
Theories of Wages in Economics
Classical and modern economists developed several theories to explain how wages are determined. Key theories include:
- Subsistence Theory
- Wages Fund Theory
- Marginal Productivity Theory of Wage
- Demand–Supply Theory of Wage (Modern Theory)
This lesson focuses on the last two because they are widely used in modern labour markets and agricultural economics.
Marginal Productivity Theory of Wage
According to the Theory
Wage is equal to the value of marginal product (VMP) of labour:
Wage = Value of Marginal Product (VMP)
This means labour is paid based on the extra value they add to production.
Assumptions of the Marginal Productivity Theory
The theory works under the following conditions:
- Perfect competition exists.
- Labourers are homogeneous (same skill level).
- Law of diminishing marginal returns operates.
- Factors can substitute each other.
How Wage Is Determined
If employing an extra labourer adds more to revenue than the wage paid, hiring is profitable.
But due to diminishing returns, marginal product eventually falls.
Firms hire labour until:
Wage = Marginal Value Product (MVP)
If wage rises above MVP, hiring reduces. If wage is below MVP, hiring increases.
Illustration
If ON is the labour supply and OW is the equilibrium wage, an increase to OW’ creates unemployment (NN’) because firms hire fewer workers.
Trade unions can raise wages, but only if productivity rises enough to shift the MRP curve upward.
Criticisms
- Labourers are not identical in skill.
- Theory ignores the supply of labour.
- Real entrepreneurs do not calculate marginal productivity perfectly.
Demand–Supply Theory of Wage (Modern Theory)
Demand and Supply of Labour
- Demand for labour comes from producers. It depends on the Marginal Revenue Product (MRP).
Hence, the demand curve slopes downward. - Supply of labour rises with higher wages.
Hence, the supply curve slopes upward.
How Wage Is Determined in the Labour Market
Wage is determined at the point where labour demand equals labour supply.
Wage Determination in an Industry
At point E, the wage rate OW₀ is determined where demand = supply.
Labour employed = OL₀ units.
Wage Determination in a Firm
Under perfect competition:
Wage = MRP = ARP (at the highest point of MRP)
The firm is a wage taker—it accepts the wage decided by the industry.
Conclusion: Understanding Wage Makes Economics Easier
Wage may seem like a simple payment concept, but it plays a major role in labour decisions, cost of production, and farm budgeting. Understanding how wages are determined—whether through marginal productivity or demand–supply forces—helps you analyze real labour markets more confidently.
If you’re building a deeper understanding of agricultural economics, explore related concepts and practical examples on Pedigogy’s resource hub. Our goal is to make economics simple, structured, and exam-ready for all agriculture and veterinary students. You can find the full course here: Visit our Economics section here.
Updated on November 15, 2025
