Wages

I

Introduction

Wages, in economic theory, price paid for labor. Wages consist of all payments that compensate individuals for time and effort spent in the production of economic goods and services. The payments include not only wages in the ordinary, narrow sense—the earnings, computed generally on an hourly, daily, weekly, or output basis, of manual and clerical workers—but also weekly, monthly, or annual salaries of professional and supervisory personnel; bonuses added to regular earnings; premiums for night or holiday work or for work exceeding stated norms of quantity and quality; fees and retainers for professional services; and that part of the income of business owners that compensates them for time devoted to business.

In the U.S. since the 1970s, the share of national income going to wages has been approximately three-fourths of the total, an increase from the 1939-65 level of about two-thirds.

Wages may be reckoned at time rates, piece rates, or incentive rates. Wage earners on time rates may be docked for days, hours, or even minutes of absence or idleness, but salaried workers usually received fixed sums for each pay period, whether or not they are continuously on the job. Workers on piece rates are remunerated uniformly for each unit output. Those receiving incentive wages are paid according to formulas relating output to earnings in ways designed to induce higher production.

A high rate of pay does not ensure large annual earnings. Construction workers are paid relatively high hourly rates, but their annual income often is low because of the irregularity of their employment. In addition, nominal wages do not reflect real earnings accurately. During a period of inflation the real value of wages may fall although nominal wages rise, because the cost of living rises more rapidly than monetary earnings. Deductions from wages for income taxes, social security taxes, pension payments, union dues, insurance premiums, and other charges further reduce the worker's take-home pay.

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II

Determining Influences

The influences determining wage levels in particular countries at particular times are as follows—Cost of living: Even in poor societies, wages are usually at least sufficient to pay the cost of sustaining workers and their children; otherwise, the working population will not reproduce itself and will decline. Standards of living: Prevailing living standards influence conceptions of what constitutes a so-called living wage, thus helping to determine wage levels. Improvements in general living conditions generate moral pressures for giving laborers a share of the better life. In the presence of such pressures employers are more inclined to grant wage increases and legislators are constrained to approve minimum-wage and other laws designed to ameliorate the worker's lot (see Minimum Wage). This effect is not large. The relative supply of labor: Where labor is scarce relative to capital, land, and other resources, as in the United States in the 19th century, employers' competitive bidding for labor tends to raise the general wage level. Where, as in present-day India, the ratio of labor to other resources is high and where accordingly the supply of labor greatly exceeds demand, competition among laborers for the relatively few available jobs tends to depress the wage level. Productivity: Wages tend to rise with productivity. Productivity depends partly on the energy and skill of the labor force and even more on the level of technology employed. U.S. wage levels are high largely because American workers apply skills of a high order to the operation of an abundance of the most advanced industrial equipment. Bargaining power: The organization of labor in trade unions and in political associations enhances its relative bargaining power and thus tends to win for organized labor, especially in time of deflation, a larger share of the national income (see Inflation and Deflation).

III

General Wage Level

The general wage level is an average of widely differing individual pay rates and earnings. The various elements contributing to wage differentiation are as follows—Relative value of product: An industrious and skilled worker who produces a more valuable output than workers of lesser capabilities is worth more to an employer and usually is paid more. Costs of required capabilities: Employers must pay the price of special training if they are to fulfill their need for workers so trained. If engineers did not receive more compensation than laborers, relatively few persons would invest the time, money, and effort required to become engineers. Relative scarcity of specific kinds of labor: Common labor is paid poorly because it is common, but entertainers, such as movie stars and television performers, who have qualities regarded as unique enjoy very large incomes. Comparative attractiveness of occupations: Difficult, disagreeable, or dangerous jobs usually bring higher rates of pay than do more inviting jobs requiring comparable skills. Thus, a truck driver engaged in moving explosives earns more than one delivering groceries. Mobility of labor: Where the working population is immobile, wage differentials are wide. On the other hand, the readiness of workers to change jobs or to move long distances to better-paying positions tends to narrow wage differentials among firms, occupations, and communities. Comparative bargaining strength: A union may lift the wages of its members above the scales paid to unorganized workers of equal skill. Custom and legislation: Many wage differentials are rooted in custom or legislation. For example, both custom and legislation are responsible for the fact that black miners in South Africa have long earned only a fraction of the wages paid white miners doing equivalent work. On the other hand, governments and unions frequently act to eliminate wage differentials based on race, sex, and other irrelevancies and to standardize wages generally.

IV

Theories of Wages

Most wage theories reflect overemphasis on one or another of the elements determining wages. The first noteworthy wage theory, the just-wage doctrine of the Italian philosopher St. Thomas Aquinas, emphasized moral considerations and the role of custom. A just wage is defined as that which enables the recipient to live in a manner suited to the person's social position. Aquinas's theory is a view of what wages should be rather than an explanation of what they actually are.

The first modern explanation of wages, the so-called subsistence theory, emphasized the consumption needed to sustain life and maintain the working population as the chief determinant of wage levels. The theory was adumbrated by mercantilist economists, elaborated by the Scottish economist Adam Smith, and developed fully by the British economist David Ricardo. Ricardo argued that wages are determined by the cost of barely sustaining laborers and their replacements and that wages cannot long depart from the subsistence level. If earnings should fall below that level, he contended, the labor force would not reproduce itself; if earnings should rise above it, more working-class children than the number needed to replenish the labor force would survive and wages again would be forced down to subsistence levels by the competition of laborers for the available jobs.

The assumptions of the subsistence theory were invalidated by the facts of subsequent economic history. In advanced countries, the output of food and other consumer goods increased more rapidly than population during the later 19th and 20th centuries, and wages accordingly rose well above subsistence levels.

The wage theory of Karl Marx is a variant of Ricardo's wage theory. He argued that under capitalism labor seldom receives more than bare subsistence. According to Marx, the surplus remaining is appropriated by the capitalists as their profits. Like Ricardo's theory, Marx's view was nullified by later economic experience.

After the decline of the subsistence theory, attention shifted to demand for labor as a wage determinant. The British economist John Stuart Mill, among others, propounded the so-called wages-fund theory to explain how the demand for labor, as expressed in the money employers have available to pay for labor, influences wages. The theory rests on the assumption that all wages are paid out of past accumulations of capital and that the average wage rate is determined by dividing the share set aside for wages by the number of employed workers. Wage increases for some workers could mean reductions for others. Only by augmenting the wages fund or by reducing the number of laborers could the wage level be raised.

The wages-fund theorists were mistaken in assuming that wages are paid out of past capital accumulations. Wages actually are paid mainly out of current production. Wage increases, by strengthening buying power, may stimulate production and generate more wage-paying potential, especially if unemployed resources exist.

The wages-fund theory was succeeded by the marginal-productivity theory, concerned mainly with the influence exerted by the demand and supply of labor. Proponents of the theory, which was developed largely by the American economist John Bates Clark, maintained that wages tend to be set at the point at which employers find it profitable to engage the last job-seeking worker, who is called the marginal worker. Because, by the principle of diminishing returns, the value of each additional worker's contribution to production is supposed to diminish, growth of the labor force depresses wages. If wages should rise above the level assuring full employment, part of the labor force would become unemployed; if wages should fall below that level, competitive bidding by employers for the additional workers would push wages up again.

The marginal-productivity theory is defective in assuming perfect competition and in ignoring the effect of wage increases on productivity and buying power. As the British economist John Maynard Keynes, a vigorous critic of the theory, demonstrated, wage increases may bolster an economy's propensity to consume rather than to save; expanded consumption creates new demands for labor, in spite of the higher wages that must be paid, if higher incomes can arise out of decreased unemployment.

Most economists recognized, with Keynes, that higher wages need not cause reduced employment. A more serious danger that can result from wage increases is inflation, for employers are inclined to raise prices to compensate for large wage outlays. This danger can be averted only if wages are not allowed to outrun productivity. Because labor's share of the national income has been virtually constant and is likely to remain so, real wages can rise mainly to the degree that productivity rises.

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