The Theory of Wages

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

^ • 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.
^ • 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 +).

[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 +).

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