1.8 The Wages of Labor
It is clear, in primitive societies or isolated locations, that the prosperity of an individual is entirely dependent on his ability to produce for himself the necessities and conveniences of life - that Is, that the welfare of an individual is the product of his own labor.
It is only in a larger and more advanced society, in which economic activity occurs among larger numbers of people, that the connection between the two becomes more difficult to perceive, and the most absurd notions about the wages of labor arise as a result of misperception.
The Relationship of Labor to Employers
It is possible, though somewhat uncommon, for a single independent workman to obtain the tools and materials necessary to his trade, and the resources to sustain himself during the period of production until his goods are finished and sold. Such an individual enjoys the full measure of the product of his own labor.
The more common arrangement is for perhaps twenty workers to serve under the direction of a master - and it is the master who owns the workshop, equipment, and materials to produce goods, and retains ownerships of the finished product and collects the proceeds of its sale.
It is alleged that the master unjustly collects profit from the sale of goods and pays a wage that is only a fraction of the value produced by his workers. However, this overlooks the fact that the laborers have no means to produce anything at all were it not for the facility, equipment, and materials their master provides. In addition, the shop-master provides training to his workers and coordinates the sale of goods to the buyer.
Additionally, the master assumes all risks of the business. The laborers collect a constant wage, well in advance of the product of their work product being sold in the market. Their wages are safeguarded against the risk that their product will not fetch the expected price, and even if the product is lost or stolen, the workmen retain their incomes from production.
The Negotiation of Wages
The amount of wages to be paid to a worker is a transaction of sale, much as any other, in which their master acts as buyer. And as in any commercial transaction. The laborer, as a seller, wants as much as he can get for his labor and the master, as a buyer, wants to give as little as he must.
Ultimately, a price is set that is considered fair by both parties, mitigated by the value of labor in a given market. If the master offers too low a wage for labor, he cannot obtain the workers he needs to produce goods. If the laborer demands to high a wage, he will find no master that will hire him.
In such instances, the master cannot justly complain that wages demanded are unfairly high nor the laborer justly complain that wages offered are unfairly low. If there is no opportunity in the market for the master to find cheaper labor or the worker to find better compensation, they must question whether their demands are, indeed, fair.
The free negotiation of a fair wage is interrupted only by collusion: all masters in a given location, especially a remote and small village, could collude to pay no more than a specific wage for labor. Such a cartel is unsustainable, as workers will depart the area to obtain fair wages elsewhere, until the shortage causes one master offers better wages to attract workers, and the collusion is broken. (EN: How ironic that legislation to enforce a minimum wage, intended to benefit workers, is established in defense against the unlikely potential for employers to collude to set a wage for labor, and results in exactly the same situation.)
It is also possible for workers to collude to increase the price of labor, such as is common in labor unions and trade guilds. However, in doing so they increase the cost of goods in a market, to the detriment of all buyers. And such collusion likewise collapses when cheaper goods are imported into a market and producers either change production of move their facilities, decreasing the demand for labor to the point where some laborers break away from their unions to accept work. (EN: Which brings to mind another act of government, charging import tariffs on cheaper foreign goods to protect domestic production, to the detriment of all consumers.)
Other Factors Influencing Wages
The chief determinant of wages in any market is the supply and demand of labor, which functions much the same as the determinant of the price of any good - the buyer negotiating for the lowest price, the seller for the highest. When there are more workers than employers have need of, it is a buyers market and employers can obtain workers for lower wages. When there are fewer workers than employers have need of, it is a sellers market and workers can obtain higher wages.
It is also noted that not all workers are equal in value, due to productivity and scarcity. Division of labor creates specialized workers with skill in a specific task. While there is a great multitude of unskilled laborers, there are relatively few master weavers, and an employer in need of such a skilled worker negotiates for a rarer commodity and must pay a higher price based on supply and demand for that commodity - the number of master weavers seeking employment, which is very few.
While the worker is able, in the process of negotiation, to reduce the amount of wages he demands in exchange for his labor, there exists a minimum amount that he is able to accept, by virtue of his need to earn sufficient income to sustain himself and his family. It is reckoned that, in order for a population to be sustained over a long period of time, each couple must raise at least two children to replace themselves - and in Smith's time, half the children born would die before reaching adulthood, so it is more likely each worker should seek to earn sufficient income to support a household of six.
The profitability of business also impacts the need for labor: a landlord or master also seeks to obtain income from his operations, sufficient to cover his expenses and generate sufficient revenue for his own expenses - like the worker, the very minimum of which must provide for the necessities of life in his own household, and therefore must calculate the maximum wage he can offer based on the amount of revenue he must receive for his goods in the market, minus the non-labor costs of production, to achieve this minimal level of income. It is only when his income exceeds his needs that he can consider returning a greater share of profit to the workers.
Market prices of finished goods also impact the producer's estimation: he cannot merely raise the rates of his workers and pass along the cost to the consumer of goods without decreasing the quantity that buyers will be willing to purchase at his demanded price.
The ability to produce relies not only on labor, but on the potential for labor to be put to productive use. This may vary by the season - there is a greater demand for farm labor during the planting and harvesting seasons than during the remainder of the year.
For example, there is in almost every part of Britain a distinction between summer wages and winter wages, with the former being significantly higher due to increased need of farm labor. After this season, the farm workers are idle and can engage in other pursuits that do not depend on the weather, so the winter wages of manufacturing work are lower due to the glut of idle workers seeking a means to earn. (EN: though it would stand to reason that the prudent farm worker, like the prudent farmer, would create a store of summer wages for his winter consumption.)
Demand for labor may also depend on the availability of raw materials, such that when there is a surplus of iron, there is a greater need of metal-workers to fashion it into goods. Naturally, this is mitigated by the market - the ability to sell the goods produced by labor - but the capability to produce goods at all impacts the need for labor, hence the value of labor, hence the wages that must be offered to obtain workers. In cases where goods are non-perishable and the employer has sufficient wealth, goods may be manufactured in excess of present need to be stored for future sale, resulting in an increase in the immediate need for labor, but a decrease when the goods are sold from inventory and manufacture is not needed.
Wealth vs. Growth
In terms of markets, it is not the actual amount of wealth in a nation that influences wags to rise, but growth in production. Where production is growing, the need for labor is advancing beyond its supply. Where production is decreasing, there is less need for labor than supply of it. Where production is neither decreasing or increasing, the supply and demand of workers are matched and there is neither shortage nor surplus to influence wages in either direction.
Smith contrasts England, an established market of considerable wealth, to that of America, a new market of meager wealth but considerable growth (EN: in the late 1700's). The wages paid to laborers in every part of America are far higher than the wages paid in England for workers in the same professions. While America is "not yet" so prosperous as England, there is much higher rate of growth, and the expansion of production far exceeds the expansion of population, creating a considerable labor shortage.
In such a situation, where there is wealth in one nation and production in another, trade between nations results in the transference of wealth. Those in England purchase goods manufactured in America, and in that way the static wealth of a more established society contributes to the prosperity of workers in a growing society. For the wealth of England to contribute to the prosperity of workers in England, it would need to be spent on goods produced in England.
Wages and Prices
As stated earlier, the prosperity of an individual is to be considered by the necessities and conveniences he is able to obtain by means of his own effort. The nominal amount of money-wage he earns reflects his ability to obtain goods, but the price of goods in the market.
In an area where the price of rent, food, clothing, and every good is triple what is asked in a smaller town, the wages that workers must demand for their laborer is correspondingly triple. A worker who earns merely double the amount in other areas is disadvantages. While his nominal wages are higher than those of laborers in other areas, his standard of living is diminished.
In the aggregate, the welfare of a people reflects their ability to obtain goods cheaply. Smith considers at some length the decrease in the price of agricultural goods in England - the cost of foods (potatoes, carrots, cabbages, etc.) being presently half what they had been some forty years prior, as the plow has replaced the spade, making farm labor more productive. The same is observed of cloth, which is manufactured by mills instead of by hand. As a result, the welfare of even the poorest Englishman has been considerably improved - the laboring class are no longer staving peasants dressed in tattered rags, but well-fed and well-clothed. He remarks that the welfare of this lowest class is a reliable indicator of the prosperity of a nation, as no nation can be considered prosperous if the majority of the population is in desperate need of the basic necessities of living.
The Effect on Population
In reference to the number of workers available in a society, and the contrast in growth in established and emerging nations, Smith considers the effect of wealth on the birth rate, which ultimately leads to the number of workers in a market when they grow to adulthood.
He regards with some curiosity the propensity of the poor to breed. Women "of fashion" scarcely have more than two or three children, whereas a "half-starved" peasant woman in the highlands of Scotland "frequently bears more than twenty children." While poverty would seem to impeded the ability of parents to afford to provide for the welfare of children, the poor breed at a much higher rate than the wealthy, and while the rate of childhood mortality is significantly higher, the net result remains a constant growth in the poorer classes.
(EN: Smith does not explore the reasoning behind this, which may be just as well. Explorations of the topic generally arise from class prejudice - that the poor have little self-discipline and are not intelligent enough to make procreative choices based on their ability to support children. It seems absurd to consider procreation to be a matter of intelligent choice, as is driven by instincts that are baser than the logical faculty, but somewhat accurate to suggest that the wealthy and educated refrain from having children due to their own restraint, and that this is the less "natural" of the two.)
The result of increased population is increased demand of goods and an increased supply of labor to produce them, in equal proportion. As such, the consequence of an increasing population in a society is increased production.
(EN: The remainder of the chapter is a pastiche of topics, each covered in scant detail, and little of general interest. Smith suggests that slavery is a temporary necessity of an economy where there is insufficient labor, but becomes less economically advantageous than hiring free workers when they are available. He maintains that is is more sustainable to hire additional workers and place on them a moderate workload then fewer men who are overworked. He disputes that most men prefer to be idle than productive, and that misery is the only motivation to labor, etc.)