TP12. False Paths to Higher Wages

What is a fair wage? How can employees get it? Who or what decides the level of wages? Are employers and employees natural enemies? Read on for an in depth discussion of these questions.

A Fair Wage- The United Nations’ Declaration of Human Rights tell us that “Everyone has the right to just and favourable remuneration, ensuring for himself and his family, an existence worthy of human dignity.”
It would be hard to deny this. How could anyone say that wages should be unfair? But what is just remuneration? Who is to decide the level of wages needed to maintain the natural dignity of human life? And if we manage to reach a consensus on what constitutes a fair wage, how do we ensure that everyone gets it?

Should we even try?
There are those who believe that wages should be left to market forces. Acording to them, government regulation, only hinders production and increases unemployment. And they are certain that allowing the strongest, cleverest and most enterprising to compete freely for the highest prizes benefits us all through the advancement of industry and the creation of jobs.
Others believe just as strongly that unbridled economic forces simply give free reign to human selfishness. They allow those already rich, who have easy access to the sites, raw materials, machinery and equipment necessary for production in a modern technological society, to underpay those who have only their ability to work.

Who is right?
What is the economic principle governing wages? Should we accept it as beneficial, or simply inescapable, and allow it to work freely? Or is it a blindly callous force that needs to be carefully controlled to protect the weak from the gross unfairness of its operation?
The answer to the question of what determines wages must lie in the  nature of the production and ownership of wealth.
The full product of the worker’s efforts.
Essentially, wealth is the product of the effort human beings make to obtain whatever they need and desire from the surrounding environment. At the stage in human development when the earth’s freely available resources were so vast in relation to population that everyone had the opportunity to make use of sites and raw materials of equal quality, wages (the reward for work) would have been determined by the quantity and quality of the worker’s exertion. Some might have achieved greater wealth by working with extra energy, determination or ingenuity, but everyone would have had an equal opportunity to create wealth and everyone would own exactly what he or she had worked to create, no more and no less.
The product of the best remaining sites
In the circumstances where all the best land had been claimed but there were poorer sites still freely available, the amount of wealth a person obtained would no longer depend solely on his/her effort. Some would have more and some less because of the unequal quality of the land they occupied. Some people might now choose to work for others on the better sites rather than claim poorer land for themselves but they would not work for less than they could get by working independently on the best of the remaining free sites.
Everyone would still have an  opportunity to work for him- or her- self but everyone would not have an equal opportunity to create wealth. Wages (the reward just for working) would now be set by the amount of wealth that could be produced on the best of the remaining unoccupied sites.

The struggle between employers and employees
Once every inch of habitable land has been claimed as private property and there are no freely available sites, those without land have to acquire it through purchase or the payment of rent; or, if they are too poor to do either of these, they have to work for others. The landless are now completely dependent on those who control land for the opportunity to earn a living. Wages now depend on the outcome of a struggle between employees to obtain the most employers will give, and employers to keep wages down to the least employees will accept.

Factors which tend to raise wages
1. The bargaining power of workers, as individuals, is very small in relation to that of employers, who control the sites and technology essential for production. Workers can, however, maximise their power by coming together to agree the minimum wage for which they will all work.

2. The conviction within a society that there is a minimum standard  below which no citizen should be allowed to fall leads to government action to relieve poverty through minimum wage regulation and unemployment benefit. Even without wage regulation, unemployment benefit works to fix an unofficial minimum wage as no one will work for less than he/she can get for doing nothing.
Factors which tend to lower wages
1. The existence of a pool of unemployed people ready to take up any jobs that become vacant, reduces the bargaining power of workers even when they combine to act as a body. In 2003 the fire service employers, who could point out that they had a waiting list of people willing to join the service at current rates of pay, were successful in resisting the firemen’s demand for a substantial pay rise.
When there is an acute shortage of jobs on offer, wages fall to the lowest level people will work for and government regulation for a higher rate becomes largely ineffective. Five years after the introduction of the minimum wage  in 1999, at a time of general prosperity, 200,000 people were still being paid less than the legal minimum. This was because across the country there were pockets of high unemployment where many people had only the choice between very low wages or none.
2. Employers are able to protect their profits by putting up prices whenever they agree to a wage rise for their employees. Higher prices put up the cost of living for other workers, who in turn demand wage rises – which lead to more price rises. There is, therefore, continual pressure for wage increases which are continually negated by a decline in the purchasing power of money which lowers real wages.
The true interests of employers and employees.
Employers regard wages as one of the costs of production and aim to keep them as low as possible in order to maximise their profits (the excess of their income over their expenditure). But low wages reduce the purchasing power of workers as consumers, restrict the amount of goods that can be sold and limit the profits that employers can make.
When the suppliers of raw materials and of partly finished goods cover a wage rise for their workers by raising prices, they put up the costs of other employers. These employers then either reduce production and lay off workers or put up prices to cover their increased costs. The price rises reduce the power of consumers to buy their goods, restrict the power of manufacturers and of their suppliers to produce and set off another round of wage demands.
Workers naturally aim to secure the highest wages possible to provide for themselves and their families, but the power of workers to raise the share of total production taken as wages is limited in prevailing economic conditions. The extraordinary advance in the means of production during the last two centuries plus the determination of workers to come together and fix the minimum wage for which they will work has produced a huge increase in real earnings since Victorian times in the Western world. Everyone now has access to a range of goods that the early Victorians could not even have imagined. And yet we have not reached a state of general prosperity and economic contentment. Instead of the Victorian “poor” – hungry, in rags and living in hovels – we now have the “disadvantaged” living on unemployment and housing benefit on “sink estates” in the “deprived” areas of the country, also referred to as areas of “social exclusion.”
A sense of injustice drives workers into strikes which alienate customers, lower the profits from which wages are paid and even threaten the survival of the enterprises on which workers depend for their jobs. Even when a wage rise is amicably negotiated the gain by workers is only temporary because the increase in wages is passed to consumers as price rises and the purchasing power of the higher wages soon drops.
The fruitless struggle in which wages continually chase rising prices and a price rise follows every wage rise only limits production and reduces prosperity generally. The true interest of employers, employees and consumers is identical: that there should be a large quantity and wide range of high quality goods and services on offer at the lowest possible prices to a public with wages high enough to buy them all.
The true path to higher wages and universal prosperity.
Since wealth is the product of human energy, mental and physical, applied to the natural resources of the earth, wages are fair when everyone has equal access to these resources and everyone is able to keep the product of his/her own effort. A fair wage cannot result from a tussle between employees and employers after an unfair distribution has already been made of the source of all wealth, the Earth itself.
The unfairness of this distribution affects employers as much as employees. When prices are put up to cover a wage increase , consumers’ purchasing power is reduced. So consumers either have to buy fewer higher-price goods or cut down on something else in order to afford them, or buy cheaper poorer quality substitutes. In all cases the amount of good quality goods employers can produce shrinks. But thr damage to businesses is not evenly spread.

Employers in the least favourable situations – receiving no grant or subsidy, having to make do with the least favourable sites on which it is possible to operate, paying a mortgage or rent as well as the high rate of interest charged by the banks on the money borrowed to equip firms in these shaky positions – these employers have no choice but to pass on a wage increase. But it is these employers, operating at the very edge of profitability, who are most likely to be driven out of business by the reduction in sales produced by the price increases.

Emplyers whose profits are boosted by subsidy or grant and/or the ownership of the most advantageous locations – benefiting from natural qualities like fertile soil or a high mineral content, or from human improvements like a city shopping centre or a convenient railway line – these employers do not even need to pass on a wage increase to their customers as higher prices. But they are able to do so because firms in poor locations are forced to do so. The collapse of disadvantaged firms when the market shrinks reduces competition and allows the remaining firms to charge higher prices for scarcer goods. 

Of course, a rise in prices also increases the pressure within society for higher wages to maintain the standard of living people are accustomed to. The pressure of employers for higher profits, of employees for higher wages and of customers for cheaper goods, find their natural balance at the point of satisfaction for all. It is the inequality of opportunity to create wealth that restricts production and depresses wages.
The solution is to level the playing field for all enterprises so that the risk of reduced sales as a consequence of a price rise is evenly spread. When there are no disadvantaged firms to take the brunt of a reduction in sales, all employers will be deterred from making unnecessary price rises to cover a wage increase.
Practical Steps.
The way to level the playing field, not only for all employers but for their employees as well, is to make a fair distribution of the source of all wealth, the earth itself.

The gap between what a worker contributes to production and the share of the profits that he/she receives in wages is in reality a hidden payment for access to the land that everyone needs to be able to earn a living. Some employers are able to hold onto that payment, others have to pass it on in the form of rent or mortgage repayments. In both cases, some individual or company is receiving unearned income and workers are being deprived of part of their earnings.
The remedy for this injustice is to give everyone an equal claim on land. Of course, in complicated present-day societies it isn’t possible, and wouldn’t be useful, to attempt a physical share-out of the earth’s surface. But the same effect of giving everyone an equal opportunity to benefit from the environment can be achieved by replacing our current taxes with a charge for the occupation of land.
If instead of paying the taxes that now act as a fine on the provision of wanted goods and services, everyone pays the community for access to land, then no one will grow rich simply through being in control of the most productive locations. Advantages of location will translate into higher land rents paid to the community and will thus be  shared by everyone as the improvements to public services and infrastructure they are used to fund. If the land rent collected proves to be more than is needed to provide public services, the surplus can be distributed as a citizen’s income. All land will be assessed for land rent according to its productive capacity when used efficiently so no one will be able to afford to hold on to more land than he/she needs or to leave any land that is needed for housing, commerce or industry, idle. When all the land that is needed is made available for use, the pool of unemployed workers will disappear or at least be greatly reduced, and wages will naturally rise. No employer will be able to pass on the land charge or an increase in wages as higher prices because these prices will be undercut by those working on cheaper land. In this situation the share of profits taken by all employers will be simply their wages for the work of setting up and running the organisation. And once the land charge has been paid there will be nothing extra to pay if production increases so employers and employees alike will have a strong incentive to increase their earnings by producing more goods.
Depressed areas of the country will enjoy the double benefit of relief from taxes on production plus a very low rate of land rent and economic activity will become possible on currently unusable land. Maximised economic activity will lower the prices of goods and services, raising real wages without even the need for negotiation between employees and employers.
The only effective means to higher wages is the undoing of the mistake which made the earth itself the private property of just some human beings, reduced others to dependence on them for the means of existence, and limited human capacity to create wealth.

Further reading

The Future of Work    Charles Hardy.  Blackwell 1984