Theory of Wages
Harry Gunnison Brown
[Reprinted from the Henry George News,
September, 1956]
Most of us are aware of the law of diminishing returns. In order to
discuss this law in connection with the problem of wages we shall use
a very simple illustration. In studying geography the student is shown
a globe. From this he may gain a general understanding of the world
even though he cannot find on it such details as the creek which runs
across his uncle's back yard. But surely it is an advantage for him to
study the globe. For the purpose of this discussion we will assume
that two factors of production, land and capital, will remain fixed or
static. Further, that with three men working together 13,000 bushels,
yards, tons of (say) wheat, corn or "widgets" can be
produced yearly. If a fourth worker is added the output becomes 16,600
bushels. In other words, the fourth man has added to or increased the
output, by 3,600 bushels. If a fifth worker is added the total output
is 20,000 bushels, or the last worker adds 3,400 bushels. With a sixth
worker the output becomes 23,200 bushels, or the sixth worker adds
3,200 bushels. When a seventh worker is added the output is 26,200 or
the seventh worker adds 3,000 bushels. With eight workers the output
becomes 29,000 or the eighth worker has added 2,800 bushels. Thus we
can see the operation of the law of diminishing returns. While each
additional worker makes possible a greater total product, the amount
added by an extra worker is less when there are many workers employed
than when there are fewer. The reason for such "diminishing
returns" is that with more workers and no more land and capital
for them to use, each worker is less well equipped or provided with
these essentials for effective production.
Along with the productivity of labor-what is added by the worker --
we must consider the law of demand and supply. To state it simply, so
long as the supply of workers exceeds the demand for workers, there
will be a bidding for jobs. This means that unemployed workers will
take jobs for a lower wage, thus bidding down wages. On the other
hand, when the demand for workers at a certain wage, exceeds the
supply of workers who are seeking jobs, then establishments must offer
more to secure the workers. This tends to bid up the wage which must
be paid.
To summarize what has been presented, wages tend to be fixed by
demand and supply at the point where the wage is equal to the marginal
product.
The marginal product in our illustration can be arrived at in this
fashion. We shall assume that there are 675 workers in this community
and 100 establishments which are seeking workers. The wage, as we have
just seen, cannot be fixed at a point which would result in some
workers being unemployed for they would accept work for lower wages
(unless some well enforced law forbade hiring workers for less) and so
bid down the wages. Neither can the wage be so low that the demand for
workers far exceeds the supply of workers, thus bidding up the wage.
If this point of equilibrium (where all workers are employed) is to be
reached, many of the 100 establishments must take seven men. Since the
seventh man adds 3,000 bushels of wheat (the worker's productivity)
this is what will be the worker's wage. To translate it into terms of
money, let's assume that the wheat sells for $1.00 per bushel. That
would mean that the worker's wage would be $3,000 annually.
But you may be wondering why the wage in our illustration would be
fixed at this point of 3,000 bushels or $3,000 per year. We have found
that at this point all workers would be employed. It would be
definitely worth-while adding the fourth, fifth, sixth worker, and the
seventh worker could also be employed, for in each case the worker
would add more than or, in any case, as much as it would be necessary
to pay him. However, it would not be worthwhile to add the eighth
worker for he would only add 2,800 which would be less than the wage
he would have to be paid. You may well ask the question "But what
about the seventh man, if he must be paid $3,000 and he only adds
3,000 bushels (or $3,000) ?" Some employers will decide to take
the seventh worker (say 75 establishments) while for others (say 25
establishments) it does not seem worthwhile to add the seventh. This
point of doubt -- whether to hire or not to hire -- is the margin. The
product added by that worker is the marginal product. (In our
illustration that was 3,000 bushels of wheat.) This would mean that
those establishments -- 75, in our illustration -- on which it seemed
worthwhile hiring seven workers, would pay each worker an annual wage
of $3,000. For those establishments on which it did not seem
worthwhile hiring more than six workers the wage would still be the
same -- $3,000 annually. (If it will aid in understanding, the reader
may assume that, on 75 of the establishments, the worker adds very
slightly more than 3,000 bushels.)
Perhaps you have some objections such as these: Not all workers are
equally efficient. Some workers are stronger, or more intelligent, or
have been on that particular job much longer (seniority); thus are
worth more because they produce more. Why, then, should all workers
receive the same wage? True, in real life workers are not all alike.
Workers who consistently produce more because of one or more of the
reasons just noted, generally are aware of this fact and demand a
higher wage. Their firms or companies are apt, also, to be aware of
their superior efficiency and to pay them higher wages. Otherwise such
workers may seek other jobs. This is a different situation than arises
when we note that, in our illustration, the fourth man added 3,600
bushels of wheat, 3,400 bushels were added by the fifth man, the sixth
man added 3,200 and the seventh added 3,000. If the fourth man, when
no better than the others, were to quit, leaving only six men working,
the total output would be reduced by only 3,000. That is all he is
really worth. Of course in real life we cannot be so precise or know
so definitely the exact amount added by each worker. All we can do is
to use the best judgment we have in such matters. Certainly an
employer is unlikely to hire a worker if he feels pretty sure that the
amount of product added by that worker is worth less than the wages he
must be paid. Wages depend on production, and workers' production is
less when the capital and laud in proportion to workers is less. How
could an employer pay current wages to his workers, if each of them
had only a pointed stick to work with and a square foot of earth to
work on?
Now to return to our point that the fourth, fifth, sixth, etc.,
worker -- assuming these workers to be equal in efficiency -- add a
progressively decreasing amount to the total output, yet each worker
will receive the same wage which is determined by the marginal worker
(in our illustration the seventh worker. But you may say, the fourth
worker added more than the seventh worker. Why must he receive the
same wage? Does not the fourth worker add (or produce) more than the
fifth worker? The crux of the matter is that with additional workers
without additional capital and land in like proportion, there are
diminishing returns. If the fourth worker feels he is not receiving a
just wage, quits his job and goes to another, he may become the
seventh worker at this latter establishment. And if he is one of
seven, on the establishment where he is now working, his quitting
would leave six workers and would reduce the total output by only
3,000 bushels. To the employer he is the seventh!
The total product in our example, with seven workers, was $26,200.
The wages were $3,000 per worker, making total wages of the seven
workers come to $21,000. The sum of $5,200 remains, therefore, as
income ("interest") for those who have provided the capital
used in production and as rent to owners of land and sites.
Now let's go back to the original number of workers in our
illustration -- 675 workers and 100 establishments -- which resulted
in seven men being hired by many establishments and a wage of $3,000
annually. Suppose a law which cannot be evaded sets the wage which
must be paid at $3,400. This would mean that the firms could
not afford to hire more than five workers apiece. Only 500 would be
hired and 175 would be out of work. If any labor organization attempts
to create such a situation, some workers might have a higher wage but
many could not earn at all.
A somewhat similar situation arises if a labor group is permitted to
limit the number of workers in a given line. Let us suppose, for
example, that the number of workers able to learn a particular trade
is thus limited. Then those who would go into that trade were it not
for the limitation which prevented their doing so, must seek
employment in other lines. Therefore, there are more workers in other
lines; and because there are more workers in these other lines the
wages in them are forced down. The results are better for workers in
general if supply and demand in a free market are relied on instead of
arbitrary wage fixing.
We have seen that wages are determined by the worker's productivity.
It was also seen that this productivity of the worker diminishes with
each additional worker ("diminishing returns"). Now let's
consider what can be done to increase the worker's productivity and,
consequently, his wages. Workers who are better supplied with tools
and other means of effective production can produce more. Machinery
and tools are classed as capital, along with fruit trees, cattle,
ships, trucks, locomotives, etc. All of these are really tools and all
are classed as capital. More and better capital increases the worker's
productivity and thus strongly tends to increase wages.
Presumably a farmer can produce more wheat if he has a farm of 200
acres than if he has a farm of 30 acres. So we can see that more good
land can also have an influence on what the worker (not alone
the farm worker, but it is perhaps easier to see the influence there)
can produce and, therefore, on the worker's wages.
Let us consider what can be done in our tax policy that will result
for our workers in more and better tools and more good land. The tax
system in the United States to which we are accustomed today, goes
unnecessarily far in taking away from those who save and invest, the
natural reward (in extra productivity of industry) of their saving. It
does not do as much to promote saving and investing in capital as the
best tax system could do. If our tax system draws too heavily on what
capital yields, we may drift into socialism and compulsory saving as
necessary in order to provide the capital equipment on which labor
must depend.
Neither does our present system accomplish as much as the best system
could do to force into use more good land. Our present system does
little to discourage or penalize the holding of good land out of use.
In the United States this is a very real problem when we consider that
about a third or more of city and in America is held out of use. If
instead of taxing capital as heavily as we do today, land (bare-land
value not including any capital in the form of land improvements or
other capital) were to bear most of the burden of taxation, the
results would be far different than are secured by the system with
which we are familiar. A system which taxes land values is a means of
securing public revenue that does not lessen the incentive to save and
invest in capital and does not burden the poor.
Such a system would be more favorable to capitalist incentive than
any other system of taxation whatsoever. It would mean more effective
use of our natural resources and our valuable city sites, so often
held wastefully out of use. It could -- and would -- conduce to higher
wages for workers. And this no other system of taxation would do or
could possibly do. No system of labor organization and no policy of
labor unions can possibly -- without creating substantial
unemployment-raise the wages of workers to a higher level than the
productivity of workers. Do our labor leaders - to whom the workers
look for guidance-want to do the best possible for the rank and file
workers who are their constituents? If so, they must cooperate --
better still, lead -- in securing the adoption of a tax system which
will raise wages by increasing worker's productive power. To be able
to do this effectively, they must gain an understanding of the cause
and effect relations explained in this discussion.
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