The Theory of Wages
Encyclopedia
The Theory of Wages is a book by the British economist John R. Hicks published in 1932 (2nd ed., 1963). It has been described as a classic
microeconomic statement of wage determination in competitive markets. It anticipates a number of developments in distribution
and growth theory and remains a standard work in labour economics
.
Part I of the book takes as its starting point a reformulation of the marginal productivity theory of wages as determined by supply and demand
in full competitive
equilibrium of a free market
economy. Part II considers regulated labour markets resulting from labour disputes, trade union
s and government action. The 2nd edition (1963) includes a harsh critical review and, from Hicks, two subsequent related articles and an extensive commentary.
The book presents:
Section I. The Text of the First Edition (248 pages)
Part I — The Free Market
Chapter
I. Marginal Productivity and the Demand for Labour
II. Continuity and Individual Differences [analysing current objections to marginal productivity]
III. Unemployment [examining different effects from "normal unemployment," casual unemployment, seasonal unemployment and other
foreseeable factors, such as wage rigidity]
IV. The Working of Competition [including the theory of "bargaining advantage
," local and occupational differences in wages, labour mobility,
and exploitation of labour]
V. Individual Supply of Labour [including variations in wages from efficiency of labour and effect of wage rates on labour supply
]
VI. Distribution and Economic Progress [on absolute and relative shares of labour in social income as influenced by elasticity of substitution
,
an increase in the supply of one factor of production, and invention].
Part II — The Regulation of Wages
VII. The Theory of Industrial Disputes [including origins of labour combinations, the idea of a fair wage, diagrammatic treatment of strike
duration, and conditions favoring labour union success]
VIII. The Growth of Trade Union Power
IX. Wage-Regulation and Unemployment
X. Further Consequences of Wage-Regulation
XI. Hours and Conditions
Appendix [with discussion and mathematical proofs on statements in Chapter IV about absolute and relative shares of income (the "Social Dividend") relative to its elasticity of derived demand
, with or without increasing returns]
Section II. Documents (57 pages)
Section III. Commentary (80 pages) [on respective earlier chapters and Section II documents, concluding with mathematical "Notes" on the elasticity of substitution
as to its definition, generalization to multiple factors and products, and application to Marshall rules of derived demand
]
Classic book
A classic book is a book accepted as being exemplary or noteworthy, either through an imprimatur such as being listed in any of the Western canons or through a reader's own personal opinion. The term itself is closely related to Western Canon and to various college/university Senior Comprehensive...
microeconomic statement of wage determination in competitive markets. It anticipates a number of developments in distribution
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
and growth theory and remains a standard work in labour economics
Labour economics
Labor economics seeks to understand the functioning and dynamics of the market for labor. Labor markets function through the interaction of workers and employers...
.
Part I of the book takes as its starting point a reformulation of the marginal productivity theory of wages as determined by supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
in full competitive
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
equilibrium of a free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
economy. Part II considers regulated labour markets resulting from labour disputes, trade union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s and government action. The 2nd edition (1963) includes a harsh critical review and, from Hicks, two subsequent related articles and an extensive commentary.
The book presents:
- labour demand as derived from the demand for output, such that for example a fall in the wage rate would lead to substitution away from other inputs and more labour use from increased production that the lower wage would facilitate
- the first statement of the economic concept of elasticity of substitutionElasticity of substitutionElasticity of substitution is the elasticity of the ratio of two inputs to a production function with respect to the ratio of their marginal products . It measures the curvature of an isoquant and thus, the substitutability between inputs , i.e...
, a measure of the substitution effect posited above as to how much one much one factor of production (say labour) would change to keep output constant in response to a change in relative factor prices - the relation of this concept and its determinants to the distributionDistribution (economics)Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
of factor-income shares - technical changeTechnical changeA technical change is a term used in economics to describe a change in the amount of output produced from the same amount of inputs. A technical change is not necessarily technological as it might be organizational, or due to a change in a constraint such as regulation, input prices, or quantities...
as biased or neutral (later termed Hicks-neutral technical changeHicks-neutral technical changeA Hicks-neutral technical change is a change in the production function of a business or industry which satifies certain economic neutrality conditions. The concept of Hicks neutrality was first put forth in 1932 by John Hicks in his book The Theory of Wages...
), depending on how it affects the marginal productMarginal productIn economics and in particular neoclassical economics, the marginal product or marginal physical product of an input is the extra output that can be produced by using one more unit of the input , assuming that the quantities of no other inputs to production...
of one productive factor (say labour) relative to that of another (say capitalCapital (economics)In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
) - a macroeconomic hypothesis about induced innovationInduced innovationInduced innovation is a macroeconomic hypothesis first proposed in 1932 by J.R. Hicks in his work The Theory of Wages. He proposed that "a change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind—directed to economizing...
that "[a] change in the relative prices of the factors of production is itself a spur to invention, and to invention of a particular kind—directed to economising the use of a factor which has become relatively expensive," including from one factor (say capital) growing at a faster rate than another (say labour) (p. 124) - elements of employee-employer attachments in distinguishing regular and casual labour with an emphasis on expectations, imperfect informationInformation economicsInformation economics or the economics of informationis a branch of microeconomic theory that studies how information affects an economy and economic decisions. Information has special characteristics. It is easy to create but hard to trust. It is easy to spread but hard to control. It...
and uncertainty in the labour market - the first-ever attempt to model a labour dispute that might end in a strikeStrike actionStrike action, also called labour strike, on strike, greve , or simply strike, is a work stoppage caused by the mass refusal of employees to work. A strike usually takes place in response to employee grievances. Strikes became important during the industrial revolution, when mass labour became...
.
Topical outline
The body of the second edition is 384 pages, following a 9-page analytical table of Contents. It is organized as follows.Section I. The Text of the First Edition (248 pages)
Part I — The Free Market
Chapter
I. Marginal Productivity and the Demand for Labour
II. Continuity and Individual Differences [analysing current objections to marginal productivity]
III. Unemployment [examining different effects from "normal unemployment," casual unemployment, seasonal unemployment and other
foreseeable factors, such as wage rigidity]
IV. The Working of Competition [including the theory of "bargaining advantage
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
," local and occupational differences in wages, labour mobility,
and exploitation of labour]
V. Individual Supply of Labour [including variations in wages from efficiency of labour and effect of wage rates on labour supply
Labour supply
In mainstream economic theories, the supply of labor is the total hours that workers wish to work at a given real wage rate....
]
VI. Distribution and Economic Progress [on absolute and relative shares of labour in social income as influenced by elasticity of substitution
Elasticity of substitution
Elasticity of substitution is the elasticity of the ratio of two inputs to a production function with respect to the ratio of their marginal products . It measures the curvature of an isoquant and thus, the substitutability between inputs , i.e...
,
an increase in the supply of one factor of production, and invention].
Part II — The Regulation of Wages
VII. The Theory of Industrial Disputes [including origins of labour combinations, the idea of a fair wage, diagrammatic treatment of strike
Strike action
Strike action, also called labour strike, on strike, greve , or simply strike, is a work stoppage caused by the mass refusal of employees to work. A strike usually takes place in response to employee grievances. Strikes became important during the industrial revolution, when mass labour became...
duration, and conditions favoring labour union success]
VIII. The Growth of Trade Union Power
IX. Wage-Regulation and Unemployment
X. Further Consequences of Wage-Regulation
XI. Hours and Conditions
Appendix [with discussion and mathematical proofs on statements in Chapter IV about absolute and relative shares of income (the "Social Dividend") relative to its elasticity of derived demand
Hicks-Marshall laws of derived demand
In economics, the Hicks–Marshall laws of derived demand assert that, other things equal, the own-wage elasticity of demand for a category of labor is high under the following conditions:...
, with or without increasing returns]
Section II. Documents (57 pages)
- G.F. Shove, 1933. "The Theory of Wages. By J.R. Hicks," Economic Journal, 43(171), pp. 460-72.
- J.R. Hicks, 1935. "Wages and Interest: The Dynamic Problem," Economic Journal, 45(179), p p.456-468.
- _____, 1936. "Distribution and Economic Progress: A Revised Version," Review of Economic Studies, 4(1) , pp. 1-12.
Section III. Commentary (80 pages) [on respective earlier chapters and Section II documents, concluding with mathematical "Notes" on the elasticity of substitution
Elasticity of substitution
Elasticity of substitution is the elasticity of the ratio of two inputs to a production function with respect to the ratio of their marginal products . It measures the curvature of an isoquant and thus, the substitutability between inputs , i.e...
as to its definition, generalization to multiple factors and products, and application to Marshall rules of derived demand
Hicks-Marshall laws of derived demand
In economics, the Hicks–Marshall laws of derived demand assert that, other things equal, the own-wage elasticity of demand for a category of labor is high under the following conditions:...
]
See also
- Distribution (economics)#Neoclassical distribution theory
- Hicks-Marshall laws of derived demandHicks-Marshall laws of derived demandIn economics, the Hicks–Marshall laws of derived demand assert that, other things equal, the own-wage elasticity of demand for a category of labor is high under the following conditions:...
- Technological change#Economics
- Labour economics#Neoclassical microeconomics of labour markets
- Value and CapitalValue and CapitalValue and Capital is a book by the British economist John Richard Hicks, published in 1939. It is considered a classic exposition of microeconomic theory...
(complementary 1939 book by Hicks)