2: Nominal and Real Wages
In any marketplace in which money is a medium of exchange, there arises a difference between the real and nominal wages of the worker, and this needs to be apprehended with great clearness in the context of any discussion of wages.
Real wages represent the necessities and comforts of life a worker seeks to earn by undertaking employment. Nominal wages are the amount of money he receives by the agreement he has with his employer. The difference is subtle but important: money is merely a means to an end, and a worker who agrees to work for a given wage knows its worth at the moment of the agreement, but when prices rise in the market he will find himself able to afford less than he expected when his wages are paid.
(EN: money is often blamed, as most wages are paid in money, but discrepancies arise even in systems of barter. An employee who works for a share of the product also faces risk that the product will be worth less in trade by the time he is paid for his work - just as a farmer's fortunes depend on the price of his crops in the market. He plants with a specific expectation, but the value of his crop may be more or less when it is sown and brought to market. So even if the farmer promises a hand two percent of the produce at time of harvest, the farmhand's real income is uncertain.)
Walker identifies five reasons real and nominal wages may differ:
- Variations in the purchasing power of money
- Varieties in form of payment
- Opportunities for extra earnings
- The regularity or irregularity of employment
- Longer or shorter duration of laboring power
He will consider each in detail.
Variations in the Purchasing Power of Money
Walker briefly considers the debasement of currency, which was rather a common problem in his time. Governments, eager to increase their treasury or reduce their debt, often recourse to debasing their coinage - enabling them to have more money for the same amount of precious metal. This can be done by re-alloying the coins (an English "pound" contains less than a third pound of silver), or by changing denominations (the modern "ounce" is 1/16 of a pound, whereas the ancient ounce was 1/12 of a pound).
Where currencies are based on the exchange value of precious metals, they may fluctuate simply because of the fluctuations in the value of gold and silver. Bimetallic systems have always been problematic in this regard, particularly when the price of one metal rises against another and coins are melted because they are worth more as metal than their denominations suggest. In recent centuries, the great influx of gold from the new world, and the exportation of it to the East, has wreaked havoc on the value of a gold coin, regardless of weight or denomination.
The use of commercial paper has also caused the value of money to fluctuate, as it increases the amount of currency in circulation. A merchant who issues a bill of credit to borrow ten pounds of silver, and who then spends the silver, has effectively "created" an extra ten pounds' worth of currency until the time his bill is paid and the bill is taken out of circulation. The widespread practice of trading in bills and notes means that there is far more than double the amount of "money" in circulation than specie in vaults to redeem it.
Fiat currency further complicates this matter, as nations in time of crisis will print out vast sums in bills and notes that will be redeemed decades in the future on the expectation of collecting tax revenue in the future. Frequently, governments do not redeem their bills with specie, but with newer bills, flooding the market with paper. The example of "continental currency" in the United States provides an excellent example: continental dollars were meant to be exchanged for silver coin - but even at the onset, $1 in coin was worth $1.75 in paper - and within three years, a $1 coin was considered to be worth $500 in paper. Woe to the worker whose contract required him to collect a fixed wage in paper money during that time.
The debasement of money often has the false appearance of an increasing price of goods. The rabble, unacquainted with the subtleties of currency, will quickly complain that an item that cost a dollar now costs five - and cannot seem to understand it is not that goods are more expensive, but that their currency has been debased.
There is also the notion that money has its own supply and demand, such that when there is less money circulating in the market, the value of each coin is increased for demand for it. He quotes a historical figure who mentioned how cheap eggs seemed to be, "not because eggs were plenty but because pennies were few."
This effect is almost always highly localized, reflecting the relative supply of currency to goods in a given trading area, but it does cause a migration of goods and people to places where prices for the goods and labor are most advantageous, which over time brings the economy back to balance. In some instances, though, this process may take years.
Ultimately, sorting out comparisons of wages in different locations, as well as in different eras, must be done with an eye toward the prices of goods in the markets. A man who earns ten dollars a day in a market where bread costs a dollar is no better off than a man who earns two dollars a day in a market where bread costs twenty cents. They can both have ten loaves for a day's labor, regardless of the difference in their nominal wages.
(EN: It has also been observed that trade is often in terms of luxuries rather than necessities. That is, wages adjust to enable workers to obtain food, shelter, and other survival goods - for if they did not, workers would be unable to survive and leave the area. But the excess beyond necessity is traded for luxury. So to return to the example, if the two workers needed only five loaves a day for their families survival and spent the excess on baubles imported from yet a third location, the worker with the higher nominal wage would be able to afford more imported luxuries.)
Varieties in form of Payment
In the author's time, payment to workers was made in a greater variety of forms: not all workers received cash for their labor or were paid, in whole or in part, with other things.
Walker speculates on this a bit, but eventually finds a historical example of a farm worker whose pay was quite complicated: the man received a house for himself and his family, a plot of land to plant for his own consumption, the keep of a cow whose milk was his, a share crops at three different times of the year, a few tons of coal, a pig, a five pounds in money.
To the economist, who wishes to monetize all things, this is quite perplexing. To the farmhand, who wants to feed, shelter, and supply his family of their various wants and needs, it is more straightforward: the use of the house means he does not need wages to rent one, the supply of foods and fuels means he does not need wages to buy them, the ability to profit from selling a share of crops gives him a windfall, and the little bit of money provides for the necessities other than food and shelter. Such a man, while making very little money, might have pleasant life, better still than a man who earned more money but was able to purchase less for it.
Opportunities for Extra Earnings
The wage of a worker is used to obtain the necessities and comforts of life for his household, but this consideration often fails to account for the fact that his wage is not always his sole source of income.
Consider that the worker may have opportunity to make additional income at his place of employment, or to earn money from other sources when he is not at work. Other members of his household might also earn revenue that enables him to accept a lower wage.
There are also means of satisfying needs aside of his wage: a family may raise its own food, weave its own cloth, and undertake other tasks that substitute for or significantly decrease the need of money to provide for the household.
Regularity of Employment
The stability and regularity of employment are also factors in the demand of wages. The needs of a worker and his household are ongoing and regular (e.g. they will need a certain amount of food each day, and will continue to need it for as long as they live), and as such workers favor employment that is stable and regular.
Or more aptly, a worker who does not expect his work to be regular and stable will seek sufficient wages to provide for his needs during periods when wages will not be received. This is in the same manner that a farmer will plan to raise enough crops in the fall to carry his household through the winter.
There are many professions in which work is seasonable - and even in those where it is not, it is generally subject to demand for product in the market. If the market does not desire as much, less needs to be produced, and less labor must be employed. The worker who suspects in advance that his wages will fluctuate will likewise seek a higher wage to provide a reserve for the slack periods.
There is a brief consideration of regularity of compensation - whether wages are paid out each day, once a week, once a month, or even once a year. To the example of the farm-hand, the arrangement may be to pay him when the crops are sold, but he must sustain his family in the meantime.
Walker lists, without elaboration, some of the causes of varying regularity of employment: the nature of the occupation, the effect of seasonality, social causes, and industrial causes "of a general character."
It's briefly mentioned that sickness and injury also pose a risk to workers for which they will require a reserve - not merely to sustain their households during their incapacitation, but to cover the additional cost of health care. It stands to note that professions that are dangerous, and subject workers to an elevated risk of being injured or contracting a disease, are expected to pay more for this reason.
There are also cultural and religious factors that limit the amount of time a worker is willing to labor, and must earn enough on working days to sustain him through non-working days. Most Europeans will not work on Sundays and religious holidays, which on average are about 90 days a year. Among the Hindu, religious observances consume "nearly half the year" and civic holidays add to this total.
There's a diversion about the pointlessness of strikes, which were common with unions of the author's time: the workers often refuse to work in exchange for higher wages, but it takes quite a long time after the strike to make up the difference in total income: if workers strike for a month to get a five percent raise, it will take them 1.6 years to make back the money they lost during that month. If the strike goes on for six months, it will take nearly ten years.
He finally quotes a historical account of the regular and irregular work in London of his time, but this seems entirely incidental except to demonstrate how widespread the influence of irregular employment was in his time.
Duration of Laboring Power
Walker suggests that the duration of laboring power is also a factor. This concerns the entire length of a person's working life: the age at which he enters the workforce and the age at which he retires. (EN: This seems dubious to me, as this span of time generally does not enter a person's mind. They are fixed on the needs of this week or month, this year at the most, and maybe a few into the future if they are exceptionally long-sighted. Perhaps the matter of retirement could be considered, as people wish to stop working at a given age, or must because they are unable to remain productive, but except in very rare instances, such as professional athletes, it would not seem to be a consideration.)
He does a comparison among nations that considers the duration of work, given the average age of workers, which suggests a range between about 30 and 40 years, with England and Ireland on the low end and Norway and Sweden near the high.
He then considers the trades that pose long-term dangers to health as those which command higher wages. Those who work in mining, shopping, and the "dusty trades" often die younger - such that professions with a higher mortality rate command higher wages.
Then, there's nitpicking about how those who die young skew the figures a bit. He also mentions that disability is as effective as death in removing workers from the workforce - and work that requires repetitive motion or ex[poses men to the elements will often render them unable to work, though still technically alive.
Conclusion
In all, the idea of using nominal wages as a comparisons among the income of various men is a flawed concept. Not only must a wage take into consideration the purchasing power of the money in which it is denominated, but the additional factors must be considered. A job may pay twice as much in wages, but be far less appealing for the other factors mentioned.