The Theory of Wages
The Theory of Wages is a book by the British economist John Hicks, published in 1932. 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 unions and government action. The 2nd edition 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 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, depending on how it affects the marginal product of one productive factor relative to that of another
- a macroeconomic hypothesis about induced innovation that " 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 growing at a faster rate than another
- 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.
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
Part I — The Free Market
Chapter
- I. Marginal Productivity and the Demand for Labour
- II. Continuity and Individual Differences
- III. Unemployment
- IV. The Working of Competition
- V. Individual Supply of Labour
- VI. Distribution and Economic Progress .
- VII. The Theory of Industrial Disputes
- VIII. The Growth of Trade Union Power
- IX. Wage-Regulation and Unemployment
- X. Further Consequences of Wage-Regulation
- XI. Hours and Conditions
Section II. Documents
- G.F. Shove, 1933. "The Theory of Wages. By J.R. Hicks," Economic Journal, 43, p -72.
- J.R. Hicks, 1935. "Wages and Interest: The Dynamic Problem," Economic Journal, 45, p -468.
- _____, 1936. "Distribution and Economic Progress: A Revised Version," Review of Economic Studies, 4, p -12.