Factors Determining Wages

factory against factory

There are many situations in which one human works for another. They range from slave to partner. The range of differences in power between counterparts in these relations differ greatly from slave and master to partner and partner. A third factor to consider is the size of the pool of laborers not already employed. Records of slavery practiced against individuals show that slavers had clear knowledge of the amount of food necessary to maintain the lives of slaves, the amount necessary to maintain productivity, etc. In wartime Germany and Japan, captured soldiers, foreign nationals, and certain minorities were enslaved and individuals were considered entirely expendable. Keeping prisoners alive required a certain amount of food. Keeping prisoners alive and working required more. When food was not available in the required quantities, work would suffer and slaves might die. But the labor pool was plentiful.

Slave holders in the United States took care to preserve their investments. Slaves were valuable property, both because of their use in the arduous work of harvesting cash crops such as cotton and tobacco, and also for their status as capital goods. Raising a slave with a good constitution to salable age was a good investment for the slave masters.

After the Civil War ended in the United States, the legal status of those who had been slaves changed. However, the economics of raising crops requiring great numbers of workers, especially at harvest time, had not changed. The owners of plantations needed to employ the same number of workers, and it was in their interest to reproduce the conditions of life under slavery as closely as possible. It was most profitable for the plantation owners to pay the least wages that, in combination with repressive means, could hold an adequate labor force in their employ. In some ways the plantation owners were freer to cut costs because, no longer owning their workers, as long as they could maintain adequate work for the number of laborers hired, the fate of those who fell out of this virtually captive work force was of no concern to them. Sharecroppers could be exploited to the point that they could only marginally maintain their own health and safety. No concern need be given to education, recreation, or other "frills."

A similar system of landlord-tenant relationships was maintained for hundreds of years in China, and the bitter feelings that had accumulated by the nineteenth century fueled both the revolution that ended the Manchu Qing dynasty and the following communist revolution that seized control from the Nationalist party, the KMT (國民黨 Guó Mín Dǎng or Kuo Min Tang in the old romanization system). The CCP (Chinese Communist Party) supported much of its nation-building efforts by acerbic attacks against the old land lord class. The KMT only began to make real progress when, after their territory was reduced to Taiwan, they conducted a thorough land-reform policy that ended the age of the land lords and transformed the former land lords by giving them incentives to invest their wealth and capabilities in capitalist enterprises. Experiences of generation after generation of tenant farmers indicated to everyone that there was no decent form of paternalism at work in the vast majority of these relationships. Land owners took as much as possible of the wealth gained by farming for their own use. Patterns of arbitrary control that may have been worked out in order to rule over tenant farmers and other servants were even applied by elders to the younger generations of their own families, and the position even of married women, concubines, and women who were sexually available to the land owners were very similar to the positions of complete slaves. To get a semi-autobiographical account of life under this system, read the novel Family by Ba Jin. (See The Family translated by Wu Jingyu.)

Examine the situation of workers and employers in the world today. What conditions place limits on the jobs that workers are willing to take, absent any of the overt coercive factors seen in prisons and in countries that are run like prisons? The ultimate limitation is that ill-paid workers become too infirm to work productively (a detriment to the employer), too infirm to work, or die. Unless there are high rates of unemployment that might make workers stay on the job to at least have stomachs that are partially full, unless there are no social safety nets that provide a survival-level income to unemployed people, then workers will not work without the prospect of being able to stay alive at these jobs. In some cases, workers will remain homeless while accepting part-time and/or bare-survival jobs. The only financial reason an employer would pay more than the bare minimum would be considerations of training new laborers after the old have departed. Employers in industries that involve unskilled laborers and produce products with no observable advantages over the products of their direct competitors may be forced to pay no more than their competitors wage rates because otherwise their products would be priced out of the market.

Supply and demand conditions dictate that higher wages will be paid only when the supply of workers needed for a certain class of laborers is limited, forcing the employers to compete with each other on the basis of compensations offered to laborers. In this matter employers have some flexibility since workers may be willing to work for lower wages if they get health insurance, on-site daycare, or some other kind of service that would be expensive for them but can be bought for less by the employer because of the business's buying power. Furthermore, any attempt by a relatively small competitor in a market to give higher wages might be met by their counterparts deliberately lowering their prices to force the deviant employer out of business. If corporations are "persons," they are probably sociopaths.

A second determinant on the dispersion of wealth gained by a factory or other business is how much local, county, state, and federal governments take in taxes. Typically, business owners will argue that a raise in taxes will force them to discharge employees.

A third determinant is the share allotted to themselves by the owners, corporate officers, etc. Certain amounts must be devoted to maintenance, capital expenses such as essential replacement of manufacturing equipment, etc. Typically businesses will allocate some funds to regional charities and other such public-relations opportunities.

Government is at least theoretically in complete control of taxation. Neither management, labor, nor any other interested parties have any direct way of affecting this amount, so it can be treated as a constant so far as anything done within the scope of the financial year.

The amounts allocated to non-salary compensation to workers, e.g., health insurance, to wages, and to management are entirely up to management except in the increasingly rare situations where labor unions represent workers' interests

It has somehow come to be accepted that the only purpose of a corporation is to make money for its shareholders. If this idea is accepted as an axiom, then it appears that management must look for tax loopholes so as to limit that loss to shareholders, limit non-salary compensation to workers that cannot be justified as actually adding to the bottom line, and limiting to the bare minimum the wages paid to workers, keeping in mind that below some limit production will suffer. To judge by the incredible increases in salaries and bonuses to management over the past few decades, management will not limit its own salaries to increase the payout to investors unless the latter organize themselves to force management to cut back.

Within a nation such as the United States, this problematical situation with regard to the compensation offered to workers is a variant of the Tragedy of the Commons. When some land in England was held as the private property of the landed classes, and some land was held in common by all residents of an area, the only way to control exploitation of the commons (typically as pasture) was for each individual engaged in animal husbandry to raise more sheep or other herbivores and therefore indirectly harvest more forage. While 20 sheep might be scrawnier than 10 sheep raised on the same piece of land, the total forage transformed into meat would be greater for the larger number of animals. However, taken to an extreme, the pastures became overwhelmed by browsing and the whole system could fail. The answer had to be to find one way or another to cap the number of grazing animals and allocate a percentage to each husbandry man. The end result, however, was the end of the commons. Originally, matters could have been handled by individuals all agreeing not to over-pasture the land, but human nature evidently never even made that a possibility that some community tried to realize. It would only take one non-compliant individual to ruin that scheme.

In the labor situation, one employer might have a conscience and attempt to provide workers with higher wages. However, high owner earnings are a function of rake-off. Employers with only a few workers cannot ordinarily pay themselves much more than they pay their workers. If twelve workers are paid a minimum living wage of $11,000 and they each earn $12,000 for the company, then the owner can have $12,000 for himself. However, if 120 workers are paid the same way and provide the company with the same earnings, then the owner can have $120,000 for himself. Turn this dynamic around and it is clear that an owner with 1,000 workers can do nicely with a much smaller rake-off. However, if that owner later decides to take less for himself and distribute the balance among employees, then that will mean that each employee is benefited relatively little.

A more promising approach would be for the company to charge more per widget, and earn enough more money that it could afford to increase worker wages. In the end it might reap benefits to itself by this change since workers would be more contented, would work in better health and with better morale, etc. However, the individual company cannot do this any more than an individual husbandry man could seek to save the commons by voluntarily reducing his own number of stock on the pasture. The other companies would price this maverick company out of the market, the company would fail, and the workers would become unemployed.

It might well be that all or almost all of the heads of the various companies in this economy would favor paying employees more money, but they know what will happen if they move independently. It therefore is an unavoidable consequence that government must act in pursuit of the common good. It must enforce some level of minimum compensation for workers, not only because it may comport with the desires and intentions of many employers, but also because it is a social good for all members of the society to achieve a reasonable standard of living.

When economies that can interact have not reached equilibrium, when the wages that would support a worker adequately in one economy are far lower than what is required in another economy, then another layer of complexity is added. For instance, Mexican farm workers are willing to take sub-standard wages and even work as undocumented workers subject to all kinds of coercion from unscrupulous employers because the money they manage to save will support their families back in Mexico in a way their working in Mexico could not do. Manufacturers in cities bordering on the US-Mexico border can hire laborers who work in the US but live in Mexico. They will work for less and do work that is unappealing to US citizens who can do better at other jobs. Manufacturers in the US may establish entire factories in Mexico, pay workers the going rate in that country, and sell their product to US markets. All of these things can impact US workers who must now compete with people able to survive on much lower salaries. 

People who complain about government interference with capitalistic principles by having government mandated minimum wage standards cannot logically be opposed to free competition among laborers on both sides of the border for the same jobs. China is just as capable of producing laptop computers as is the US. Those computers will reach US markets unless draconian import restrictions are imposed (which denies the general advantage in wealth creation demonstrated to hold true for all trading opportunities), and they certainly will reach other countries where the US may be seeking to sell computers. The alternative to a situation of anarchy in which foreign workers find it necessary to work under sweatshop conditions and US workers lose their jobs is to regulate international transactions to moderate the rate at which equilibrium is reached while benefiting both e.g., Chinese workers who need to be protected against exploitation by a new vampire capitalism there, and US workers who need to have their jobs not migrate to China so rapidly that their own economy does not have time to make a smooth transition to new job opportunities.


With a time lag (depending on distances among businesses hiring similar laborers and on national borders) the wages paid to laborers doing the same job depend on several interacting factors:
To make this list less abstract, consider the Acme basket factory. In the beginning it was the only basket factory in its small nation. At that time it offered wages at what was called generous by people of that locality. As area farm labor gradually becomes replaced by larger and better-designed machines, regional average wages declined, and so did the wages offered to the basket makers, partially because the owner needed to lower basket prices to be able to sell normal quantities of them to the local market.

To keep his best workers in an unstable situation wherein other trades might offer higher wages on a fluctuating basis, the owner includes daycare and a nurse's office on site. The owner works to export baskets to more and more remote domestic markets, increasing profit and the need for more labor, so the wages offered are raised to attract more good workers. The factory and the workers prosper, and, wisely, the owner listens to what complaining housewives tell him about his product and makes improvements.

The owner hires his wife to attend to design and quality control issues, but at first this change does not have noticeable consequences since the local community liked the original product very much. Then cheaper baskets come in from a newly established distant factory. The local owner sees a problem looming even though his company is expanding its market, which makes up for some softness in the local market. So when a young lady in the community is about to get married he hangs a basket on the fence that goes around his factory, and announces that people can leave small gifts for the new couple, the first to be married that year. He hangs a competitor's basket above it. The next year he does the same thing. When people come to give good wishes to that year's first couple they notice that the previous year's basket is still there and in good condition. The other basket is looking slightly tattered. After five years the owner has improved his profit and also has made his point. He has noticed that he can improve his own baskets by reinforcing a couple of places where strips tend to work loose.

During five years of prosperity and product improvement, however, he had lost some of his market and had been forced to make various economies and increases in efficiency to be able to remain successful. Other businesses in his vicinity had fared better. For instance, the bamboo fly rod manufacturer was famous in the nationwide market and even sold quantities of premium rods overseas. The other businesses could offer somewhat higher wages, and Acme Baskets employees began to drift away.

The husband and wife team found ways to increase efficiency and make the same number of fine baskets using less labor, however, imported baskets from a country with much lower standard of living and much lower wages invaded Acme's market. They were of poor quality but so cheap that people could  use them a few times and throw them away. The local basket maker had already let the nurse go and then had closed the daycare center. He was hiring higher and higher percentages of laborers with no previous job experience, and then he had to hire less and less desirable labor as the wages he could offer continued to decline.

Toward the end he could hire only first-time job holders who still lived at home with their parents and who seemed to get little personal satisfaction from making beautiful traditional baskets. Finally, wages dropped so low that the few workers who remained were old and infirm individuals who could do no jobs requiring greater physical labor, and they took sick leave more and more because they could not afford a healthy diet and needed medical and dental care. As they died or retired the owner made no effort to replace them. It was time for him and his wife to return to being artists who made the best traditional baskets and occasionally managed to sell one or two to a collector. They were glad that they had always paid themselves first and had enough in savings to live out their lives in comfort.

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Last updated 19 August 2016

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