Iron Law of Wages Posits

Iron law of wages posits that real wages will trend towards the minimum wage needed to sustain the life of the worker. The minimum will be the floor because workers must be sustained in order to be part of the labor force. However, workers will compete for jobs, driving wages down in the long run. The iron law of wages was created at a time when education standards were low and there was little differentiation among workers either in knowledge or skills.

Ricardo identified "rent" as the output of capital and labor -- specifically that which can be created by unifying those two inputs. The supply of labor, therefore, impacts the rent that can be earned. The iron law of wages is based on a relatively unending supply of labor, but in reality there are many factors that can impact the labor supply. If the labor supply is constricted - by famine, war, mass emigration or other factor -- then real wages will not trend downwards during that time, until the constriction is relieved (the "long-term" aspect of the iron law of wages). Ricardo noted that the economy could support a higher than subsistence level of wages indefinitely given a number of different factors.

One of those factors being the size of the labor supply, the distribution of income would naturally be affected by this supply. For example in an environment characterized by a long-term constriction in the supply of labor, wages would hold above subsistence levels. The distribution of income therefore would be more skewed towards wages than it would be during equilibrium under the iron law of wages. The result is that rent/profit would decrease from their equilibrium levels as a result -- wages would take up a greater proportion of the wealth created by economic activity. The ramifications for this in the economy would be that in order to maintain profits, prices would need to increase in order to match the rise in wages that stemmed from sustained constraints on the labor supply.

The Corn Laws were introduced in 1815 as import tariffs, designed to protect corn prices in Great Britain from lower-priced imports. Ricardo naturally opposed the Corn Laws, as he believed in free trade as espoused in his theory of comparative advantage. Ricardo viewed the corn tariffs as unnecessary -- if other nations can product corn better, labor would need to be repositioned in Britain to other activities in order to trade with those grain-producing nations.

The Corn Laws also had an adverse impact on wealth distribution. At the time, unemployment was high in Great Britain so it was more likely that usual that the iron law of wages would hold, given the surplus of labor. The Corn Laws essentially locked in prices for grain for local producers, meaning that land owners would see increased profits, precisely at a time when workers were seeing real wages decline.