Subsistence Theory of wages

The subsistence theory of wages was first formulated by Physiocratic School of French economists of 18th century. Further, this theory was developed and improved upon by the German economists. Lasalle styled it as the Iron Law of Wages or the Brazen Law of Wages. Ricardo and Malthus also contributed to the theory of wages. Karl Marx made it the basis of his theory of exploitation.

Assumptions:

According to Ricardo, this theory is based on the following two assumptions:

1. Population increases at a faster rate.
2. Food production is subject to the law of diminishing returns.

According to this theory, wages of a worker in the long run are determined at that level of wages which is just sufficient to meet the necessaries of life. This level is called the subsistence level. The classical economists called it the neutral level of wages. In this way, the pro-pounders of the theory believed in the bargaining power of the workers. In such a situation, trade unions play an important role in increasing wages.

Wages of labour are equal to subsistence level in the long ran. If wages fall below this level, workers would starve. It will reduce their supply. Thus, the wage rate will rise to the subsistence level. On the other hand, if wages tend to rise above the subsistence level, workers would be encouraged to bear more children which will increase the supply of workers, which in turn will bring wages down to the subsistence level.

Criticism:

Following are the main defects of the subsistence theory of wages:

One Sided Theory: This theory examines the wage determination from the side of supply and ignores the demand side.

Pessimistic: Subsistence theory of wages is highly pessimistic for the working class. It presents a dark picture of the future of the society.

Long Period: This theory is based on the assumption of long run. It does not explain the determination of wages at a particular period of time.

No Historical Evidence: This theory has been criticized on the grounds that it has not been correct in conclusions. The case of western countries is different from the conclusions of this theory.

No Difference in Wages: This theory explains that all the workers get equal wages. As we know, the workers differ in their productivity, and hence, the difference in their wages is natural.

It can be shown with the help of the following figure:

In Fig. 1 demand and supply of labour has been measured on OX-axis and wage rate on OY-axis. OW is the subsistence level of wages. At OW wage rate supply of labour is perfectly elastic. Since, supply of labour is perfectly elastic, wage rate neither can fall below OW nor can increase above the level of OW. Although demand increases from DD to D1D1 yet the wage rate remains the same at OW.