Subsistence theory of wages:-
The subsistence theory of wages is developed by David Ricardo and other classical economists. This theory is based on the Malthusian theory of population. The subsistence theory of wages is also known as “Iron law of wages”. According to this theory, wages are determined by the cost of production of labor or subsistence level. The wages so determined will remain fixed at the subsistence level even in the long run. Wages paid to workers are just sufficient to fulfill their basic needs and they don’t have surplus income.
The following are the assumptions of the subsistence theory of wage:-
- Population increases at a faster rate.
- Food production increases at a slow rate.
- There is no existence of a trade union.
- The cost of production of labor is equal to subsistence wages.
- This theory is based on the long-run concept.
If wages rise above the subsistence level the prosperity of workers increases which will encourage workers to marriage sooner and to have a large family and thus, population increases. This will increase the labor supply. The increased competition among workers for employment causes wages to fall again to the subsistence level.
Similarly, if wages fall below the subsistence level, there will be no prosperity. People will have less interest in marriage and birth. They will suffer from malnutrition, disease, and starvation, etc. and this may lead to death. This will lead to a decrease in the size of the population and thereby the supply of labor. The demand for labor exceeds its supply and wages tends to rise to the subsistence level which leads to maintaining wages ultimately at the subsistence level in the long run.
1. Ignores the demand side of labor:-
Subsistence theory of wages has emphasized on the supply side of the labor market and neglected the demand side in determining the wage. So, this theory is one-sided.
According to this theory, the wage paid to the labors should be at the subsistence level whatever will be their productivity. This theory exploits the labor because they might produce more than they are really paid.
3. Fails to explain the difference in wage:-
This theory asserts that the wages of all the workers are fixed at the subsistence level. However, wages can differ from person to person, occupation to occupation, a place to place and time to time.
4. Ignores the role of trade union:-
This theory ignores the role of a trade union but the workers make collective bargaining for their benefits through trade unions.
5. No direct relationship between wage level and population:-
According to this theory, the population increases if the workers are paid more than the subsistence level of wage and vice-versa but the shreds of evidence show that population in developed countries does not increase even if there is an increase in the wage level.
6. Pessimistic theory :-
This theory is pessimistic because it excludes all the possibilities of improvement in the economic condition of the labor.