This section is from the "Elementary Principles of Economics" book, by Richard T. Ely and George Ray Wicker. Also available from Amazon: Elementary Principles Of Economics: Together With A Short Sketch Of Economic History
We have pointed out that of the factors of production, land and labor are the primary and original ones. Having discussed rent, or the portion of the product allotted to the owners of land, we may next properly consider wages, the portion allotted to labor. First of all, it is to be noted that in the study of wages there are really two distinct problems to be investigated. What share of the total produce of industry goes to labor ? This is the problem of general wages. But having answered this question, we shall still have to ask ourselves why some classes of laborers receive greater incomes than others ; why glass-blowing, for instance, is paid for by a higher rate of wages than is ditch-digging, and so on ? This second problem is called the problem of relative wages. We shall discuss the two problems separately as we have here stated them.
1. General Wages. It follows from our discussion of the determination of value that if wage-earners were in excess of all demand for their labor, such labor would have no value ; wages would be nothing. On the other hand, if laborers were few and in great demand, only the more intense wants for labor could be satisfied, and wages, or the value of labor, would be very high. It is evident, then, that wages, the value of labor, depend primarily upon two things: the number of wage-earners, and the demand for their labor. In other words, wages depend upon the relation between the supply of labor and the demand for it. But this statement is too general to be of great use. We must therefore consider further the forces that determine the supply and the demand.
The Number of Wage-earners.We have already discussed the tendency of the human race to multiply. Beyond all doubt the desire for marriage and family is one of the strongest and most universal of human desires. But over against this desire stand many others desires for food, clothing, and a multitude of other things which are of course arranged and satisfied in the order of their economic importance. No man intentionally satisfies weaker desires at the expense of stronger ones. In the whole list of desires, that for marriage must take its place according to its importance. The rank of this desire varies with individuals and classes. Some regard education, books, art, or even a substantial bank account as more important than marriage in their scale of desires. The amount of necessaries, comforts, and luxuries which any person or class is accustomed to enjoy and to insist upon having, is the " standard of life," or the " standard of comfort," of that person or class. This standard of life, though incapable of precise definition, is a very real and powerful force in the determination of wages. Whenever wages tend to fall below the point at which the workman can maintain his standard of life for a family, many workmen will do without the family, and will attempt to maintain the standard of life for themselves alone. This force operates upon both men and women to prevent or postpone marriage, and to diminish the number of children born. The higher is the standard of life, the greater is the persistence shown in maintaining it. Those whose standard is very low are often heedless or hopeless when that standard is threatened ; while those who have attained a high standard display marked caution in delaying marriage until their income will justify such a course. It is plain, then, that the standard of life constantly limits the number of wage-earners, and hence tends to maintain or even to increase the value of labor.
The Economy of High Wages. In what has just been said we have simply noted the influence of the standard of life upon the number of laborers in the labor market. But the result is equally striking when we come to consider the influence of the standard upon the efficiency of labor. Even from the standpoint of employers as a class, the policy of depressing the laborer's standard of life stands condemned. Labor, to attain its highest efficiency, must have character and intelligence as well as mere brawn. More and more, business men are coming to learn the "economy of high wages," and that "cheap labor is dear labor." Especially is this true at the present time when industry is becoming more and more divided into the two classes of machine industry and hand industry. American labor is in many industries the cheapest labor in the world because it is the best paid. High wages make possible a high standard of life. The high standard of life makes the labor intelligent, hopeful, and full of character, as well as more efficient physically. And the increased efficiency makes possible the higher wages. Thus by action and reaction the standard of life is both a cause and a result of the wages received.
The Demand for Labor. In what has gone before, we have considered especially some of the forces that operate to control the supply of labor in the labor market. In other words, we have been considering the problem of wages chiefly from the standpoint of supply of labor. It remains for us to see how far we can explain wages from the standpoint of demand. Manifestly, under our present industrial system, capital will not be saved nor businesses conducted unless those who save the capital and those who conduct the businesses receive a reward for their contribution to production. If the laborers in seeking higher wages enforce demands that would rob the capitalist of the interest that is his due, or the entrepreneur of the profits that secure his services, then shortly the capital will cease to be saved and the unprofitable businesses will be discontinued. It is evident, therefore, that the demand for labor has an upper limit in the value to society of the product of the labor. By unjust laws, by inequitable conditions, the employers may be able to secure labor for less than the laborer contributes to the value of the product, but it is not easily conceivable that under present conditions of industry the labor can for long get more than it actually produces.
Summary of Theory of General Wages. Summing up now what has been explained at length, we may say that wages depend upon the relation between the supply of labor and the demand for it. The supply of labor, and hence the lower limit of wages, is fixed with some sharpness by the standard of life of the laborers. But as this force operates slowly, it may in extreme cases happen that the only lower limit to wages is the amount which will enable the laborers to live. In earlier days some of the economists seemed to think that wages would normally and in the long run rest at this point of bare subsistence, and the law of wages which they formulated was therefore called, from its rigidity and its harshness, the "iron law of wages." On the side of demand, we can only say that there is an upper limit, fixed by the value of the laborer's contribution to the product, beyond which wages cannot normally go, since the demand for labor cannot be measured at a higher price than the price of what it produces. Consequently the demand for labor may result in giving to the laborer in wages the whole of the product of industry after deducting rent and such minimum interest and profits as are fixed by laws to be explained later. Between the lower limit, set by the standard of subsistence or by the standard of life, and the upper limit, set by the value of the laborer's contribution to product, wages will fluctuate according to the relative bargaining strength of the two parties to the wage contract.
2. Relative Wages. Coming now to the problem of relative wages, to the question why some classes of work are paid for at a higher rate than others, it is evident first of all that the pay of laborers in any class of employment depends upon the relation between the demand for such laborers and the supply of such labor, and upon the relative bargaining strength of those in each group. Thus far the considerations already discussed bear upon relative wages as upon general wages. But in the discussion of relative wages, there are certain special considerations to be borne in mind. Differences in relative wages are settled in the great majority of cases by past conditions. To understand them we must go back to a man's father or grandfather. Occupations where remuneration is high are usually so difficult to enter that few are able to surmount the difficulties. Thus peculiar and rare qualities may be required, or an expensive training which few parents are at once able and willing to give.
While the various sorts of labor are almost infinite in number, they are nevertheless susceptible of a fairly distinct classification. These classes have commonly been called "non-competing groups." Perhaps the best naming of these is that made by Professor Giddings as follows: automatic manual, responsible manual, automatic mental, responsible mental. The words should explain sufficiently the different groups represented by them. Between any two groups very little competition is at any given time possible. What competition there is, is a matter of years, resulting, as it must, from the action of parents in preparing their children for entering one or the other of the groups.
The Influence of Public Schools. A good system of public education continually increases the amount of freedom in the choice of occupations. Education gives greater knowledge regarding the advantages and requirements of different occupations at the same time that it puts its possessor in a position where he can more readily realize the one and meet the other. It therefore tends to lessen the competition for the lowest grades of employment, thus raising the wages there; while it tends to lower the wages in the higher grades by making the competition for such employment more keen.
Adam Smith enumerated the following five causes for differences of wages in different employments: first, their agreeableness or disagreeableness; second, the ease or difficulty of learning them ; third, the regularity of employment; fourth, the need of trustworthiness in the workman; fifth, the probability of success. Although this summary of determining conditions assumes an unreal freedom of competition among workmen to secure the greatest net advantage from their employment, it nevertheless is suggestive and helpful in explaining actual differences in relative wages. It will be a good exercise for the student to apply to existing occupations Adam Smith's statement of the causes of differences in wages.