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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 – [email protected]
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.