The Real Law of Wages

Wednesday, 9/12/2013 

 

ONE OF the oldest fallacies in economics is that the amount of work done should be reflected in the amount of pecuniary reward received for doing it, writes John Phelan at the Cobden Centre.

 

How can it be fair that someone who slaves away for hours slicing kebab meat in a kitchen on a sweltering day earns £6.19 per hour while someone who kicks a football around for a few hours a week gets £2,040 per hour?

 

In fact, the amount of work we do is not commensurate with how much we are paid. Nor should it be. In the late 18th century for every bit of effort the average Indian textile worker put in he or she was paid just one sixth of what a British textile worker was paid for the same amount of effort because the British worker, with their greater capital stock, produced six times as much with that given amount of effort. Whatever our gut reactions, what wages reflect is not the 'effort' of the worker but their output and the market's and the employers subjective valuation of that output.

 

When deciding whether or not to hire, and at what wage, an employer will only employ that person if they think doing so will add more to turnover than to costs and they will not pay that person more than he or she is expected to add to turnover. To pay more would mean that that the employer is paying to employ that worker. This is the real Iron Law of Wages.