Why Wages Rise

Book excerpt: WAGES are of prime importance in any advanced economy such as ours. They affect us all far more than seems evidenced in our concern about them. Everyone buys wages, in a sense, with every purchase he makes. And three-fourths of all incomes in the United States represent pay for work done in the employ of another. So nearly every one of us is on both sides of the wage exchange, in one way or another. We all know in a general way that wages have been rising for a long time in this country, but there is evidence aplenty that the economic principles which apply to wage problems are not well understood. Probably they are no better understood now than in the early thirties when measures adopted to combat the depression proved to be such colossal failures. Fearing another depression like that which followed World War I, we now seem enmeshed in chronic and progressive inflation, which Lenin once said was a sure and simple way to destroy the capitalist system. Our “prosperity” now seems to be riding on the horns of a dilemma that will surely end in the destruction of capitalism unless we can resolve this problem which in large measure is a wage problem. I shall deal with the wage problem in a manner that may seem oversimplified. Basic principles always have a way of seeming simple. Yet if they be principles, they can no more be oversimplified than can the law of gravity or the listing of chemical elements be oversimplified. What is needed in our complex society of millions of products sold by millions of business units to over a hundred million traders through billions of transactions each year is to get back to simple economic principles. These are working tools for solving problems that seem more complex than they really are. Two Roadblocks In helping another person to resolve this wage problem, it seems to me that two roadblocks to his understanding may first have to be removed. They obstruct a thorough insight into the wage problem. One roadblock is the difference between money wages and real wages, which results in serious misconceptions. In a period of inflation such as we have long been enduring, or of deflation, a comparison of money wages in two separate years tells you no more about their relative worth than would a comparison of a daily wage in the United States with that of Chile — $10 as compared with 5,000 pesos, for instance. Money wages must first be converted into real wages before we can see their patterns of change. The other roadblock has to do with the effect of unions on wages. If you were to describe an elephant to a person who has never seen one and who had never even seen a picture of one, you probably would not describe a flea and then say that an elephant doesn’t look like that. This would not be very helpful unless the person believed that an elephant looked like a flea. In the case of unions, there seems to be a firm and widespread belief about their effect on wages such that this question must be dealt with at the outset. So we shall start there. When speaking of wages and what makes them rise, the meaning will be the over-all level of wages — the general welfare, in that sense. To speak otherwise of wages, such as wage rates for one or a few persons, would involve special situations which are not the object of this discussion. A bank robber might succeed in gaining a high wage for his hour of work; a few persons, through power and special privilege, might likewise gain some short-time advantages at the expense of the others who work. But such gains of some wage earners at the expense of other wage earners are not the aim or meaning of this analysis of why wages rise.