The Subsistence Theory of Wages with Criticisms

David Ricardo and other classical economists propounded the subsistence theory of wages. This theory was termed the "Iron Law of Wages" by German economist Lassalle and French economist Francois Quesnay, among other physiocratic economists.

According to the subsistence theory of wages, in the long run, labor wages tend to remain at the subsistence level and remain fixed. The wages paid to workers should be just enough to cover their basic needs. The wages that are just enough to cover the basic needs of workers are called subsistence wages. In other words, the wages that are just enough for workers to eat two meals, buy clothes, and arrange for shelter are called subsistence wages.

If workers are paid more wages than necessary for subsistence, they become extravagant, which leads them to marry early and have more children. As a result, the population increases. This increases the supply of labor. When the supply of labor exceeds the demand for labor, there is competition among workers for jobs. As a result, wage rates begin to fall. This process continues until the wage rate falls to the subsistence level.

Similarly, if workers are paid less wages than necessary for subsistence, their living standards become miserable. As a result, their desire to marry and have children decreases, and they suffer from malnutrition, diseases, and hunger, and some may even die. This reduces the population and decreases the supply of labor. When the demand for labor exceeds the supply of labor, wage rates begin to rise. This process continues until the wage rate rises to the subsistence level. Thus, whether the wage rate is higher or lower than the subsistence level, it ultimately tends to remain at the subsistence level in the long run.

Subsistence wages refer to the minimum wages necessary to meet the basic needs of workers and their families. Basic needs include food, clothing, shelter, education, health, and security.

Criticisms of the Subsistence Theory of Wages

The subsistence theory of wages has been criticized in various ways by different economists. Some of the main criticisms are presented below:

1. According to the subsistence theory of wages, if wages are higher than the subsistence level, the population increases. However, the experiences and evidence from developed countries have shown that the increased wages of workers have led to an increase in living standards rather than an increase in population.

2. The subsistence theory of wages is one-sided because it emphasizes the supply side of labor and ignores the demand side.

3. According to the subsistence theory of wages, workers should be paid only subsistence wages regardless of their productivity. However, critics argue that workers should be paid wages based on their productivity rather than subsistence levels.

4. Workers can determine wage rates through bargaining with employers through labor organizations for their welfare. This aspect is not explained by the subsistence theory of wages.

5. The subsistence theory of wages fails to explain the differences between individuals, professions, locations, and time periods, and the corresponding differences in workers' wages.

6. This theory is considered pessimistic because it denies the possibilities of improving the economic conditions of workers.