Q.Distinguish between nominal wages and real wages. Explain the subsistence theory of wages (Iron Law of Wages).

Nominal and real wages measure two different things — the money amount paid, and what that money can actually buy.

Nominal (or money) wages are the amount of money a worker actually receives for labour, expressed in currency terms. Real wages measure the purchasing power of that money wage — what it can actually buy in terms of goods and services — after adjusting for the general price level. A rise in money wages does not necessarily mean a rise in real wages; if prices rise faster than money wages, real wages can actually fall even while nominal wages increase. This distinction is essential for correctly judging changes in workers' true standard of living.

The subsistence theory of wages, associated with David Ricardo and later restated by Ferdinand Lassalle as the "Iron Law of Wages," argues that in the long run, competitive wages tend to settle at the level just sufficient for workers to subsist and reproduce the labour force — no higher, no lower. The mechanism follows Malthusian population logic: if wages rise above the subsistence level, workers' living conditions improve, the population grows faster, and the resulting increase in labour supply drives wages back down through competition among workers for jobs. Conversely, if wages fall below subsistence, malnutrition and higher mortality reduce the labour force, making labour relatively scarce and pushing wages back up. Over time, this feedback loop causes wages to oscillate around, and be pulled back toward, a long-run subsistence equilibrium. …

Students frequently forget to mention the Malthusian population mechanism that drives the subsistence theory, simply stating that "wages equal subsistence" without explaining why. Another common slip is confusing nominal and …