ISSN 2348 - 8891

Critical Evaluation of Subsistence Theory of Wages

With Respect to India

Prof. H.S. Kohli*

Abstract:
The subsistence theory of wages owes its origin to Physiocratic School of France. The
theory' is also named as Iron or Brazen Law of Wages by" Lasele". The subsistence theory
of wages, advanced by David Ricardo and other classical economists, was based on the
population theory of Thomas Malthus. The current study is an attempt to evaluate the
subsistence theory of wages with respect to India. It has been found that increase in wages
may/may not result in increase in population. Thus the above theory is not relevant even in
the developing country like India. This is the reason that the theory was replaced by other
theories of wages like wages fund theory, demand supply theory etc. Yet, this theory finds
its importance as it forms the strong base and support for minimum wages law, which is
based on minimum subsistence level of wages

* Assistant Professor (Management) Renaissance College of Commerce & Management, Indore

Altius Shodh Journal of Management & Commerce

ISSN 2348 - 8891

Key words:
Wages, subsistence level of wages, classical economic theory, iron law, developing country,
developed country, Ricardo, Malthus theory of population.
Introduction To Subsistence Theory Of Wages
The subsistence theory of wages owes its origin to Physiocratic School of France. The theory' is
also named as Iron or Brazen Law of Wages by "Lasele". The subsistence theory of wages,
advanced by David Ricardo and other classical economists, was based on the population theory
of Thomas Malthus. According to this theory, change in the supply of workers is the basic force
that drives real wages to the minimum required for subsistence. According to this theory, wages
tend to settle at the level just sufficient to maintain the worker and his family at the minimum
subsistence level. If wages rise above the subsistence level, the workers are encouraged to
marry and to have large families. The large supply of labour brings wages down to the subsistence
level. If wages fall below this level, marriages and births are discouraged and under-nourishment
increases death rate.
Ultimately, labour supply is decreased, until wages rise again to the subsistence level. It is
supposed that the labour supply is infinitely elastic, that is, its supply would increase if the price
(i.e. wage) offered rises. At the time that these economists wrote, most workers were actually
living near the subsistence level, and population appeared to be trying to outrun the means of
subsistence. Thus, the subsistence theory seemed to fit the facts. This theory originated with
Physiocrats and was commonly accepted during the 18th century. The German economist Lassalle
termed it the Iron Law of Wages. Karl Marx made it the-foundation of his theory of exploitation.
Review of Literature
Karl Marx. Capital Volume One Chapter Thirty-Three: The Modern Theory of Colonization The
great beauty of capitalist production consists in this - that it not only constantly reproduces the
wage-worker as wage-worker, but produces always, in production to the accumulation of capital,
a relative surplus-population of wage-workers. Thus the law of supply and demand of labour is
kept in the right rut, the oscillation of wages is penned within limits satisfactory to capitalist
exploitation, and lastly, the social dependence of the labourer on the capitalist, that indispensable
requisite, is secured
HansjoRg Herr, Milka Kazandziska, Silke Mahnkopf-Praprotnik (2009) found that "There is no
direct relationship between changes in wages and changes in employment because wage costs
directly influence the price level. An extremely low nominal wage increase or even nominal
wage cuts lead to deflation, problems in the financial system and a loss of production and
employment. Extremely high wage increases lead to inflation which sooner or later will be
combated by restrictive monetary policy. This also leads to losses in production and employment.

Altius Shodh Journal of Management & Commerce

ISSN 2348 - 8891

Minimum wages can support a desirable development of nominal wages and especially help to prevent
deflationary developments. So increase in wages not always increase the workforce, which was said in
subsistence theory of wages"
A negative employment effect on the teenage population or young adults was found for example in Van
Soest (1994), Deere et al. (1995), Maloney (1995), Bazen / Marimotou (1997), Burkhauser et al.
(1997), Abowd et al. (1997), Baker et al. (1997). General positive employment effects of increases in
minimum wages were detected, for example, by Card/Kruger (1994) und (1995), Machin/Manning
(1994), Konig/Moller (2007). Many studies have found insignificant or no employment effects after
the increase in minimum wages, for example Card (1992), Benhayoun (1994), Card/Kruger (1995,
1998 and 2000), Bell (1995), Lang/Kahn (1998), Dolado et al. (1996 and 2000), Steward (2004),
Dickens /Draca (2005) and Draca et al. (2006). Again, other studies support the neoclassical belief
that increases in minimum wages lead to negative employment effects, for example Bazen/Martin (1991),
Currie/Fallick (1996), Chapple (1997), Orazem/Mattila (1998), Burghauser et al. (2000), Neumark/
Wascher (2000), Machin/Wilson (2004). Obviously, there is no clear and no quantitatively relevant
relationship between minimum wage development and employment.
Malthus, of course, had the theory exactly backwards. History has proven that when incomes rise
above subsistence, then population growth slows (not accelerates), thanks to better education,
health, and social security.
Lassalle (1879) accepted the idea, first posited by the classical economist David Ricardo, that
wage rates in the long term tended towards the minimum level necessary to sustain the life of the
worker and to provide for his reproduction.
Jim Stanford (2010) in his study of gain in GDP due to wages found that in the last three decades,
wages have been concentrated among the top quintile (that is, the richest fifth of society). Smaller
gains were enjoyed by the second-richest quintile. But the bottom 60 percent of Canadian
households, considered together, experienced no net income gain at all. Therefore, he concludes
that the rise in wages level has different effect on different class of labours and in general doesn't
result n population increase.
Objectives of The Study
The objectives of this study are:

To study the importance of subsistence theory of wages.

To critically evaluate the subsistence theory of wages

Research Methodology

Altius Shodh Journal of Management & Commerce

ISSN 2348 - 8891

The research is based primarily on secondary data. For the fulfillment of objectives of research, a
number of essays and papers of neo-classical writers and thinkers have been studied.
Critical Evaluation of Subsistence Theory of Wages
This theory has been criticized on the following grounds:

Wages are not cause of increase in population in actual life: It is incorrect to say that
when the money income of a person increases above the subsistence level, he marries
early and the birth rate increases. On the other hand, the fact is that when the income
increases, it is generally followed by a higher standard of living and the workers do not
produce more children the birth rate is higher in poor countries.

The theory fails to explain the wage differences in different employments: According
to the theory, the wage rate tends to be equal to the subsistence level of all the workers. So
then, how is it that wages differ from occupation to occupation and from person to person?
The theory has nothing to say in defence of this criticism.

It ignores the demand side of the labour: It entirely ignores the demand side of the
labour and emphasizes only the supply side for the determination of the wages. On the
demand side, the employer has to consider the amount of work which the employee gives
him and not the subsistence of the worker.

It does not take into account the influence of trade unions: The theory does not take
into account the influence of trade unions in the determination of wage rate though it is one
of the every important factor to be taken into consideration.

Long-term character: This theory explains the adjustment of wages over the lifetime of
a generation and does not explain wage fluctuations from year to year.

Subsistence is a vague term: The term subsistence has a very vague impression. It
varies with time, country and standard of living, customs and habits.

Does not apply to more advanced countries: Subsistence Theory of Wages seems to be
applicable to backward countries like India and China where labourers are extremely
poor and their standard of living incredibly low. But the theory does not apply to more
advanced countries.

Altius Shodh Journal of Management & Commerce

ISSN 2348 - 8891

Conclusion
Subsistence theory of wages fails to explain the minimum wage rate of even developing countries like
India because the term minimum wages is a vague one. It was soon replaced b other theories such as
wages fund theory, demand supply theory of wages etc. Also, due to rising level of education and
standard of living of workers, rise in wage level doesnt result in rise in population. The theory seems to
be fit only to illiterate and non skilled workers in the context of India. Yet, this theory finds its importance
as it forms the strong base and support for minimum wages law, which is based on minimum subsistence
level of wages.

REFERENCES
1.

Global Labour University Working papers ISSN: 1866-0541, paper no. 6, feb 2009 the
theoretical debate about minimum wages hansjorg herr, milka kazandziska, silke mahnkopfpraprotnik

2.

Karl Marx. Capital Volume One Chapter Thirty-Three: The Modern Theory of Colonisation

3.

Lassalles Open Letter to the National Labor Association of Germany. John Ehmann and
Fred Bader, trans. New York: International Library Publishing, 1901. Originally published in US in 1879.

4.

What determines wages and income distribution? Jim Stanford, Ph.D. Economist, CAWCanada May 2010

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