The Theory of Wages

The Theory of Wages is a book by the British economist John 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.[1]

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 unions 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 substitution, a measure of the substitution effect posited above as to how 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 distribution of factor-income shares
  • technical change as biased or neutral (later termed Hicks-neutral technical change), depending on how it affects the marginal product of one productive factor (say labour) relative to that of another (say capital)
  • a macroeconomic hypothesis about induced innovation 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 information and uncertainty in the labour market
  • the first-ever attempt to model a labour dispute that might end in a strike.[2]
  1. ^ • M. W. Reder, 1965. [Review], Economica, N.S., 32(125), p. 88.
    • Paul Flatau, 2002. "Hicks’s The Theory Of Wages: Its Place in the History of Neoclassical Distribution Theory," History of Economics Review, June, p. 44 (press +).
    • Andrew J. Oswald, 1985. "The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, 87, No. 2, Proceedings of a Conference on Trade Unions, Wage Formation and Macroeconomic Stability, p. 160.
  2. ^ • Christopher Bliss, 1987 [2008]. “Hicks, John Richard," The New Palgrave: A Dictionary of Economics, v. 2, sect. 2, p. 642. Abstract.
       • Paul Flatau, 2002. "Hicks’s The Theory Of Wages: Its Place in the History of Neoclassical Distribution Theory," History of Economics Review, June, pp. 44-65 (press +).