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 attributed the doctrine to Lassalle (notably in ‘Critique of the Gotha Programme’), crediting the idea to Thomas Malthus in his work, ‘An Essay on the Principle of Population,’ and the terminology to Goethe’s ‘great, eternal iron laws’ in ‘Das Göttliche’ (‘On the Divine’).
According to Lassalle, wages cannot fall below subsistence 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 increases when wages are above the ‘subsistence wage’ and falls when wages are below subsistence. 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. This would create a dynamic convergence towards a subsistence-wage equilibrium with constant population.
As David Ricardo noticed, this prediction would not come true as long as a new investment, technology, or some other factor caused the demand for labor to increase faster than population: in that case, both real wages and population would increase over time. The demographic transition (a transition from high birth and death rates to low birth and death rates as a country industrializes) changed this dynamic in most of the developed world, leading to wages much higher than the subsistence wage. Even in countries which still have rapidly expanding populations, the need for skilled labor causes some wages to rise much faster than others.
To solve the question for why wages often tend towards subsistence, Ricardo put forth the ‘Law of Rent,’ which states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital. Ricardo and Malthus debated this in a lengthy personal correspondence. Antonella Stirati disputes the attribution of the Iron Law of Wages’ idea to Classical economists other than Malthus. She sees Ricardo, for example, as being closer to the more flexible views of population characteristic of economists prior to Malthus. Ricardo drew a distinction between a natural price and a market price. For Ricardo, the natural price of labor was the cost of maintaining the laborer. However, Ricardo believed that the market price of labor or the actual wages paid could exceed subsistence level indefinitely due to countervailing economic tendencies.
Furthermore, Ricardo not only believed that the market price of labor could long exceed the subsistence or natural wage but also claimed that the natural wage was not what was needed to physically sustain the laborer but depended on ‘habits and customs’: It is not to be understood that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English laborer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where ‘man’s life is cheap’, and his wants easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries in an earlier period of our history.
Wages in most countries are above subsistence level. Many modern economists believe firms pay their workers a premium over subsistence levels to make them more efficient. In the theory of efficiency wages, firms make sure that their workers have enough money to buy food and housing because adequately fed and housed workers are more productive than workers teetering on destitution. Socialist critics of Lasalle and of the alleged iron law of wages, such as Karl Marx, argued that although there was a tendency for wages to fall to subsistence levels, there were also tendencies which worked in opposing directions. Marx criticized the Malthusian basis for the iron law of wages. According to Malthus, humanity is largely destined to live in poverty because an increase in productive capacity results in an increase in population. Marx accused Lasalle of misunderstanding David Ricardo. Marx also noted that the foundation of what he called ‘modern political economy’ only needs, for the theory of value, that wages be a given magnitude.