Labour Supply

labour supplyEconomists have very often worked with the assumption of an unlimited supply of labour. But the contexts in which the assumption has been used are not the same, and it should be perhaps made clear that they are not. There are at least four strands that one can distinguish in this connexion: (i) The Ricardian wage theory based on the Malthusian law of population growth; (ii) Marx’s Industrial Reserve Army; (iii) The Keynesian concept of involuntary unemployment; and (iv) Disguised unemployment relating to an under-developed country.
Implicit in all these formulations is the idea that the wage rate is independent of the demand for labour, or, in other words, that the supply of labour is perfectly elastic. Formally they look alike but their contents are not the same.without labour supply any organisation can not work properly. So the labour supply is important.

The object of this paper is to show wherein the differences lie and incidentally also to indicate the policy implications in one or two contexts.
In the Ricardian system, there are two concepts of wages which need being distinguished. The wage rate with which Ricardo connects the profit rate is a rate which is conceived in terms of an ‘invariable standard’. This wage rate which he calls ‘the natural price of labour’ tends to rise as accumulation proceeds, in spite of a corresponding growth of population. This is due to the operation of diminishing returns in agriculture which supplies the ‘food and necessaries’ of labour.

With the natural progress of society characterized by growing accumulation and growing population, more of capital and labour is employed on a given stock of land; diminishing returns set in, and food and necessaries forming the chief items in the labourer’s budget tend to become costlier, measured in terms of an invariable standard. Therefore the wage rate, measured in terms of the same standard, tends to rise. And this rising wage rate is accompanied by a falling rate of profit, in so far as it is not checked by improvements in agriculture.
What happens, however, to wages in terms of ‘food and necessaries’—’wage goods’, as we call them, following Pigou? Here Ricardo introduces the concept of a constant wage rate. Labourers as a class have a certain definite conception of what constitutes their minimum subsistence.

This no doubt ‘varies at different times in the same country and differs materially in different countries’; yet, given the notion of a minimum standard, the wage rate, estimated in terms of goods as such, is independent of the accumulation of capital and hence independent of the demand for labour. As accumulation proceeds, the demand for labour increases. Temporarily, therefore, wages tend to rise, in so far as they are regulated by supply and demand. But as soon as this happens, population tends to grow, following the Malthusian law, and the supply of labour adjusts itself to demand in such a way that wages come down to the level of minimum subsistence. Here is a theory of wages which runs in terms of a perfectly elastic supply of labour. It is a theory which is based on the assumption of a rate of population growth having a tendency to adjust itself to the rate of accumulation. Chronic unemployment is ruled out, as also a shortage of labour relative to capital.

Marx’s wage theory is formally very much the same as Ricardo’s, although its implications are fundamentally different. Value of labour -7-power is equated, by definition, to the value of the means of subsistence necessary for the maintenance of the labourer, and it is then argued that the price of labour (the rate of wages, that is) tends to conform to the value of labour. Marx recognizes, as Ricardo does, that the nature and volume of goods that make up the subsistence of the labourer are themselves determined by the circumstances of a society. But with reference to a given stage of historical development, the minimum subsistence of labour is assumed to consist of a definite quantity of commodities.

How, then, does it happen that the rate of wages tends to conform to this minimum subsistence ? Marx explains this not in terms of a law of population growth, as Ricardo does indeed he has scant regard for the Malthusian law but in terms of what he calls ‘the reserve army of labour’.
As soon as an economy leaves off the stage of primary accumulation, as soon, that is to say, as labour gets dissociated from capital and assumes the position of wage-earner to be employed by the capitalist, it becomes the business of the capitalist to keep down the rate of wages to subsistence level with a view to creating enough ‘surplus’ to maintain the rate of profit. With an unvarying wage-output ratio, the progress of accumulation carries with it the tendency to a falling rate of profits.

This tendency can be suspended and  the profit rate maintained if wages are prevented from rising with increasing productivity of labour consequent on accumulation. The capitalist does it by resorting to one or the other of the following methods:
(a) varying the rate of accumulation ;
(b) introducing technical improvements so as to substitute capital for labour; and
(c) creating monopoly power to suppress the demand for higher wages.

Any of these methods leads to the creation of an industrial reserve army. An army of unemployed labourers is kept floating, so to speak, in the economy  to be drawn upon as need arises, without any pressure for an upward revision of the wage rate. Chronic unemployment is what keeps the wage rate down to the level of minimum subsistence, and it is this feature of a capitalist economy that renders the supply of labour perfectly elastic.

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