The subsistence theory of Wages was formulated by physiocrats in the 18th century. This theory was further developed by a German Economist namely Lassole. This theory was called as the Iron Law of wages. Karl Marx formulated his theory of surplus value on the basis of this theory.
According to this theory, wages are fixed at the level at which the size worker is able to maintain his family at a minimum subsistence. If the wages in are greater than the minimum subsistence level, it is an incentive to marry and rise population increases. Thus, supply of labour increases. Increased supply of labour brings down general level of wages. On the other hand, if wages are less than the subsistence level, they discourage marriages. It also increases under nourishment. As a result death rate increases and birth rate falls down. Supply of labour decreases.
Consequently, the wage rate increases until the is wage rate is equal to the subsistence level. This theory is applicable to economically backward countries like India and Pakistan.
Criticism of Subsistence Theory Of Wages:
1. This theory takes into consideration only supply side of the labour. It ignores the demand side of the labour.
2. The theory does not explain the causes for differences in wages.
3. It is wrong to say that an increase in the wage level will increase the size of the family. It need not lead to the expansion of families. Sometimes, it may restrict the size of the family.
4. This theory does not explain the role of trade unions in the determination of wages.