Question

What is meant by Subsistence Theory of Wages in Economics?

Critically examine and Subsistence Theory of Wages in Economics . 

Answer 1

Subsistence Theory of Wages - - - - - - -

This thought was first given by the French physiocrats, but later on Adam Smith has his other followers also developed the theory. According to this theory, labour should also be considered as a commodity which is brought and sold. Just as the price of a product becomes equal to its cost, the price of labour, that is the wage rate, becomes equal to its cost. By cost of labour they meant the minimum level of income which is essential for subsistence. This subsistence level of wage was considered the natural rate of Wages. 

According to this theory, if the current wage rate becomes higher than this natural rate, then the labour will have a propensity to increase the size of their family because they can afford greater number of children. As a result, after sometimes, supply of labour will increase and the wage rate would revert back to its natural level. As against this, if the current which rate is lower than the natural wage rate, then some labour will find the survival difficult and will be motivated to limit the size of their families. As a result the supply of labour would fall in the long run and wage rate would rise to reach its natural level.

 

Criticism of Subsistence Theory of Wages - - - - - - -

This theory might have been given according to the situation prevailing at that time, when wages were quite low and stagnant. However, the experience of last 100 years shows that wedges have been continuously rising and are far above the subsistence level. Moreover, the assumption of a positive relationship between wage rate and family size of labour also proved to be wrong. Experience showed that high wages result in smaller family size of labour and lower wages result in bigger family size. Thus, the thought given in the theory proved wrong. 

This theory was first given by the French physiocrats, but later on Adam Smith and his other followers also developed this theory.