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subsistence theory of wage


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SUBSISTENCE OF WAGE THEORY Subsistence Theory by David Ricardo(1772-1823) The subsistence theory of wage is also known as “iron law” of wage. It was so named by Lassalle, a German economist. This theory was first put forward by Quesnay, a member of physiocratic school of economists and developed by David Ricardo. The theory of population, expounded by Malthus was based on this “iron law”.

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According to this theory, wages tend to remain at the subsistence level. It will provide the workers only with bare subsistence. If wages rises above this level, this leads to an increase in the population. Because, the increased prosperity will encourage the people to marry and increase population. This will increase labour supply. The increased competition among workers for employment causes wages to fall again to the subsistence level. Likewise, if the wages fall below the subsistence level, malnutrition raises the death rate. People do not have interest in marriage. Fewer children are born. This will reduce the supply of labour. The competition for employment is reduced and wages tend to rise to the subsistence level. Finally, the wages remain at the subsistence level.

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Assumptions 1. Law of diminishing returns apply to the industry. 2 .Population increases or decreases on the basis of subsistence wages paid to the workers. 3 . Labour demand constant. 4 . No wage differentials.

Criticisms for Subsistence Theory of Wage:

Criticisms for Subsistence Theory of Wage This theory is almost completely outdated and has no such practical application, especially in advanced countries. The theory was based on the Malthusian Theory of Population. It is inappropriate to say that every increase in wages must inevitably be followed by an increase in birth rate. An increase in wages may be followed by a higher standard of living. 1.One-sided:- This theory is one-sided in the sense that it explained the wages entirely from the supply side. It completely ignored the demand for labour. 2. Ambiguous:- The most serious objection to this theory lies in the ambiguity of the term ‘subsistence level‘. What is considered the bare minimum for human existence varies between one period and another. The things like tea, radio at one time was looked upon as luxuries of the rich. But they are regarded necessaries these days.

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3. Unrealistic:- I t is not applicable in developed countries. Wages are more than subsistence level and also adequate for comforts and luxuries in developed countries. Besides, the increase in wages has not increased birth rate. In developed countries people marry late, produce less children due to high standard of living. This theory is true only in densely populated countries. 4. Wages, Not Uniform:- Unlike this theory, wages of all workers is not uniform at the subsistence level. Wages differ from occupation to occupation and from place to place. 5. Exploitation Tendency:- There is tendency toward exploitation in this theory. Because, according to the theory, wages must be equal to the subsistence level and-not for comforts and luxuries 6 . Trade unions ignored :- This theory ignores the role of trade unions. But in the present age these are playing very important role in the determination of wages.

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