Wages Fund Doctrine

Malthusian population theory was used to explain the level of real wages in the long run. Ricardian short-run explanations of wages were based on a supply-and-demand analysis known as the wages fund doctrine. It should be noted that "long run" in this context means a minimum of fifteen years. Under Malthusian population theory in its minimum subsistence form, an increase in real wages in the present year would not have repercussions on the future level of wages for some time, depending upon the age of entry into the labor force. If we assume that increases in population take place immediately when real wages rise, the supply of labor will not be affected for at least fourteen years.

As a short-run theory of wages, the wages fund doctrine simply suggests that the wage rate depends on the supply and demand for labor. These are not actually supply-and-demand schedules as used in modern economics. The demand for labor is fixed by the size of the wages fund, that part of capital accumulated to pay labor. Given the size of the wages fund, the short-run wage rate is determined by dividing the number of persons in the labor market into the wages fund. In the short run, then, the wages fund is fixed in amount, the quantity of labor is fixed, and the wage rate is uniquely determined.

With the demise of Malthusian population theory, the wages fund doctrine had to carry the weight of being both a short-run and a long-run theory of wages. This it was unable to do, because nothing in the wages fund doctrine said anything about the long-run supply of labor. The wages fund doctrine was used, however, by many popular writers as an argument against labor's attempts to raise wages, particularly through the formation of unions. In the writings by economists of this period, there appears to be no connection between views on the wages fund doctrine and attitudes toward labor unions: many economists holding to the wages fund doctrine explicitly approved of the formation of labor unions. Nevertheless, in the popular literature the wages fund doctrine became known as an anti-union economic argument; this, in part, accounts for J. S. Mill's famous rejection of the wages fund doctrine in 1869 and the importance placed by subsequent writers on Mill's disavowal.