Subsistence theory of wages is the term used in the context of economics, according to this theory wages of the workers are determined by the subsistence need of the workers. Subsistence in simple words means money needed to satisfy basic needs such as food, clothing, and shelter, and once the wages of the workers rise above this subsistence level than it will lead to an increase in the number of workers willing to work thus pushing the wages back to subsistence levels and if the wages of the workers decline below the subsistence levels than it will lead decline in the number of workers willing to work thus increasing the wages back to subsistence levels. In order to get a better idea about his concept one should look at some of the advantages and disadvantages of the subsistence theory of wages –
Advantages of Subsistence Theory of Wages
Focuses on Basic Needs
The first and foremost advantage of the subsistence theory of wages is that it focuses on the basic needs aspect of human beings, we all know that human beings are driven or motivated towards satisfying their basic needs and if those basic needs are not satisfied then all other things are irrelevant. Hence this theory addresses the concept of basic needs beautifully and thus makes it easy for a layman to understand the whole concept of subsistence theory of wages.
Simple to Understand
This theory is simple to understand in the sense that even a normal person who does not have any knowledge about economics can understand this theory because in this theory there are not many variables or mathematical equations and hence this theory can be understood easily.
Developed and Developing Nations Wage Difference
Wages in developed nations are higher than wages in developing nations and this theory in a way explains why the wages are higher because the subsistence needs of developed nations are higher for developed nations as compared to subsistence needs of developing nations and hence the difference in wages between developed nations and developing nations.
Disadvantages of Subsistence Theory of Wages
Ignores Other Factors
This theory ignores factors that can have an influence on wages as well as the willingness of the worker to work. Hence for example if the government is giving subsidies as well as guaranteed wages then some workers may not want to work even when wages are above the subsistence level thus putting a question mark on this theory, or if there is technological advancement then the company will no longer hire workers as the work of workers is done by machines and hence there is no need for the workforce.
Ignore Trade Union
This theory also does not take into account the role of trade unions when it comes to collective bargaining of wages of workers because according to this theory, the wages are only dependent on the subsistence needs of the workers which is not true as trade unions never allow a decrease in wages rather they negotiate with the company for higher wages for the workers and hence ignoring trade union is another major drawback of this theory.
Wage Differential Across Country
Another problem with the subsistence theory of wages is that it does not explain the difference of wages which is there across different regions of the country despite subsistence needs being more or less the same across the country or region, for that matter sometimes the wages differ across the same city and thus is a major limitation of this theory.
As one can see from the above that subsistence theory has pros as well as cons and that is the reason why any individual thinking of using theory for theoretical or practical purposes should carefully read the above points and then only should go ahead with any decision.