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Concept
Iron law of wages
Summary
The iron law of wages is a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nineteenth century. Karl Marx and Friedrich Engels attribute the doctrine to Lassalle (notably in Marx's 1875 Critique of the Gotha Program), the idea to Thomas Malthus's An Essay on the Principle of Population, and the terminology to Goethe's "great, eternal iron laws" in Das Göttliche.
It was coined in reference to the views of classical economists such as David Ricardo's law of rent, and the competing population theory of Thomas Malthus. It held that the market price of labor (which tends toward the minimum required for the subsistence of the laborers) would always, or almost always, reduce as the working population increased and vice versa. Ricardo believed that this happened only under particular conditions.
According to Alexander Gray, Ferdinand Lassalle "gets the credit of having invented" the phrase the "iron law of wages", as Lassalle wrote about "das eiserne und grausame Gesetz" (the iron and cruel law).
According to Lassalle, wages cannot fall below subsistence wage level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from Malthus' demographic theory, according to which population rises when wages are above the "subsistence wage" and falls when wages are below subsistence. Assuming the demand for labor to be a given monotonically decreasing function of the real wage rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will rise or fall to the number of workers needed at the subsistence wage.
The justification for this was that when wages are higher, the supply of labor will increase relative to demand, creating an excess supply and thus depressing market real wages; when wages are lower, labor supply will fall, increasing market real wages.
Official source
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