Many salary earners are under the misapprehension that real wages are only achieved through wage increases. But I will show, by discussing the relationship between wages and prices, how competition between sellers automatically leads to a just level of real wages in most circumstances.
A worker obtains buying power by virtue of his wage, and the efficacy of that wage depends upon the level of prices. If in the total scheme, $100 wages are paid to manufacture a product, and the product is sold for $125, the salary earner gets 100/125 or 80% of the cake. (These numbers must be averaged over the whole manufacturing process from mining to retail.) As profit margins are determined primarily by competition, wage increases achieve a lot less than is supposed.
The situation in England hundreds of years ago, when workers did not get a fair share of the cake, was due to collusion amongst employers, to keep prices artificially high and wages artificially low by anti-competitive policies leading to excessive profit margins. In a deregulated economy, adequate competition should automatically lead to workers receiving an adequate share of the cake. Of course, where economies of scale demand some monopolisation of certain sectors of the economy, there may be a need for regulation of wages and prices.
There are two sides to the equation that determines the share of the cake going to the workers. Firstly, competition amongst businesses, which increase the value of real wages, and secondly, competition amongst workers for jobs, which reduce real wages. The natural result of these two forces is that in times of recession, with higher unemployment, wages would fall. This would increase the profitability of business, encouraging investment, which should create jobs and lift the economy out of recession. If salaries are kept artificially high during adverse times for business, the economy is prevented from healing itself by natural means. There may however be a need for some stability in wages. For example perhaps wages should not be allowed to fall more than 10% in a year. Unfortunately the debt burden upon many would make it difficult for many to cope with such flexibility. But I discuss solutions to this in my article on interest rates.
People hope that confidence will boost the economy. But what is needed is a basis for that confidence. That basis could be the ability to maintain profit margins through bad times through wage reductions. One of the causes of recession is fear of recession. The knowledge that profitability could be more adequately maintained through difficult times could reduce the fear of recession, and could perhaps even prevent a recession from occurring, thus eliminating the need to reduce wages.
Higher productivity should automatically lead to higher real wages if competition is adequate, as there is no reason to assume that the ratio of wages : prices will change if productivity increases. If productivity is increased by harder work or increased skill, the workers should probably be paid more, but competition amongst employers for workers should determine this, not the threat of strikes. Of course, if the workers enforced lazy work practices before reform, they deserve nothing more.
Where productivity is due to better technology alone, the workers do not deserve a wage increase. However, workers will still be better off because prices will fall. If workers were not so stubborn to resist change, and demanded less in return for cooperation with management, the pace of reform would increase, productivity would increase across the board, prices would fall across the board, and all would benefit from a higher ratio of wages to prices. It is unfair that the benefits of technology should be restricted to the workers who operate that technology.
If wages are deregulated, remuneration will be proportional to the sale price of the fruits of that labour for reasons discussed. This will tend to maintain a more uniform profit margin across industries, as wages fall in less profitable industries and increase in more profitable industries. This will stabilise the economy, with fewer bankruptcies and job losses.
The fear to allow wages to float is based upon the failure to understand that the competition principle outlined should generally maintain a healthy balance between wages and prices. The primary safety net for a worker should be that if his labour is valuable, he should be able to shop around until he finds an employer who will pay him proportional to the value of his labour.
The main danger of exploitation of workers exists when some workers have their wages artificially inflated by awards and strike power and others have not. Then those with no muscle fare badly because not only are their salaries low, but they must pay high prices for goods because other sections of the workforce are overpaid or inefficient.
The availability of retraining, and the ability of companies to sack or dock the wages of inefficient workers and employ better workers would allow workers to migrate from one industry to another, evening up wages for equivalent skills. Although this could create some job uncertainty which is not good, the unions could publish information about the employment policies of companies. Thus poor employers would get a bad reputation, making it difficult to obtain good workers. This would discourage exploitation.
It may be that in some isolated pockets of the economy, some limited government regulation is required to prevent exploitation of workers, if there is a greater oversupply of labour than in the general workforce. But too much regulation will slow adjustment.
If all workers submitted to economic forces by abandoning strikes, non cooperation with management, and wage and work-rate uniformity, there is no reason to believe that any section of the workforce would be discriminated against in terms of wages. If someone’s labour is less valuable for any reason, because of youth, age, inexperience, strength, or likely short term tenure for married women, it is only fair that they be paid less. It is unfair to reduce the wages of valuable workers to subsidise those whose work value is not so great.
If good workers were paid more than those less productive, incentive would improve average productivity and thus average real wages. (the wealth of a nation is proportional to its productivity) Thus there would be more winners than losers.
It is only fair that workers in non cooperative unions have their wages docked. When a person takes a job, there is an agreement to help the company, by working to the best of one’s ability. Otherwise the rest of the community have to pay higher prices.
If when a factory is redesigned the main economic beneficiaries are the workers, there may not be enough money to adequately remunerate the engineers who are primarily responsible for the increased efficiency. Over time fewer smart people will study engineering and the economy will stagnate. There must be sufficient economic incentive to put skills where they are most needed for the improvement in the standard of living, even if this means a wider range in salaries.
There are, however, some at the top of the salary range who are being paid far too much, although not professional people such as engineers, architects, university lecturers or even vice chancellors. These listed have valuable skills and deserve as much, if not more for their contribution. A lowering of their skills would cost far more than an increase in their remuneration.
The people who are being paid too much include those whose salaries are set by their peer group of friends, such as many company managing directors. They are justified by foolish and short sighted logic. Bonuses for an increase in share price, often encourages short sighted and dishonest practices. It may also encourage exploitation of workers, which is also short sighted and not good for the long term profitability of the company.
Others, who in my opinion who are paid too much, include lawyer who can earn far more than a vice chancellor. The lawyer is often remunerated, because if he is clever, he can get more money out of someone than is fair. I think lawyers fees should be regulated down, because they are basically parasitic.
The injustice of most strikes is that not only does the employer not profit from the striker’s labour, but he is also prevented from profiting from other people’s labour. For example, suppose a farmer bought some land, hired one labourer to plough the field, a second to plant the crops, a third to tend the crops, a fourth to harvest, and a fifth to transport the crops to market. If the transporter goes on strike for more money, he is not just withholding his own labour, but he is destroying the fruits of other people’s labour.
A similar situation applies to most situations. If a worker in a car factory goes on strike, the labour to design and develop the car, and the cost of constructing the factory are wasted. As the economic damage caused by strikes bears little relation to the true value of the labour withheld, it is a travesty of justice if strikes determine wage outcomes. Would it be fair if a typist refused to type a scientific paper if they were not paid a much as the scientist.
Loss of strike power would cause some wages to fall but others to rise. But it should not lead to a general reduction in wages, because competition between sellers of products should maintain a healthy ratio of wages to prices, as I repeatedly stress in this article.
Loss of strike power would result in remuneration depending more on skills, and they would have more incentive to improve these. The resultant higher productivity with a subsequent increase in real wages would, for most, more than offset any wage reduction due to loss of strike power.
As prices are limited by competition it should be illegal to engage in a price war to knock out competition. Competition is the safest way to increase real wages. Monopolistic practices are acts of theft and should be treated as such.
Government could perhaps help competition by assisting small businesses with advertising of services and a reduction of red tape.
To the problem of alleviating poverty, competition to reduce prices is a more stable solution than regulation to increase wages. This is because increased competition takes mainly from excessively wealthy companies, whereas wage rises takes from all companies, including those on the verge of bankruptcy.
A major cost in the production of goods and services is land rental. If shop owners have to pay high rents, they must sell at higher prices. This increase in prices reduces the value of real wages. Therefore if possible, there should be an oversupply of land zoned commercial, to keep land costs reasonably low.
High commercial land prices can slow job creation, because there will be less money available to invest in equipment to start a venture, because a significant proportion is wasted in buying or hiring the land, which has always been there.
A neglected economic principle is that, with constant prices, real wages increase proportional to product durability.
Accurate consumer information is necessary for people to benefit from this principle. Information should be available, not only on durability, but also on the costs of repair.
The free market economy is supposed to work on the principle that there is incentive to make good products at a reasonable price. But this incentive can only work if consumers have adequate information. With adequate information companies who make good products would be helped to continue, and would be less likely to lose business to a cheaper competitor. This would increase the stability of the economy. New companies with good products would also be helped.