Subsistence theory – Wage TheoriesCompensation Management

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Subsistence theory• This theory propounded by

the economists in the 18th century was later explained by David Ricardo.

• This theory is based on two assumptions, namely,– (a) The law of diminishing

return applies to industry.– (b) There is a rapid

increase in population.

Subsistence theory

• The subsistence theory

laid down that ‘the

workers are paid to

enable them to subsist

and perpetuate the race

without increase or

diminution’.

Subsistence theory

• If the workers were paid

more than subsistence wage,

their numbers would

increase as they would

procreate more; and this

would bring down the rate

of wages.

Subsistence theory

• If the wages fall below the

subsistence level, the number

of workers would decrease—as

many would die of hunger,

malnutrition, disease, cold,

etc. and many would not

marry, when that happened

the wage rate would go up.

Subsistence theory• The subsistence theory is criticized on

the following grounds: – (a) The subsistence theory does not

take into consideration the demand for labour. It considers only the supply of labour and the cost of production.

– (b) This theory is based on theory of population which is itself defective. It is wrong to say that population will increase if the economic condition of the labour is improved. These days, better economic condition is associated with lower birth rate.

Subsistence theory• The subsistence theory is criticized on

the following grounds: – c) In developed countries, workers

are not merely contented with fulfillment of basic needs. They also require luxuries of life to raise their standard of living.

– (d) This theory does not emphasis the efficiency of the workers.

– (e) This theory fails to explain the wage differentials in different regions and among different categories of workers.