8: Distinguishing the Specific Product of Labor
Under ideal circumstances, the wages of labor would be equal to the revenue it creates - the revenue generated by the product, less the cost of materials, less payments to the providers of capital and less other services necessary to its sale. The difficulty tends to be calculating exactly what portion of the revenue is attributable to labor, not to mention the politics of wresting a fair share from other contributors who wish to have more.
There's a bit of diversion where the author talks about situations in which labor claims the full reward. There are instances in which an individual may work land that is deemed "worthless" and on which he pays no rent at all. He brings all his tools and supplies, and undertakes all other work necessary to sell his produce in the market. No-one else has any claim on his earnings and he keeps it all to himself.
He then speaks to instances of unprofitable business operations that provide no profit to their owners, but neither are they sources of loss. When an operation runs on a break-even basis, the only people who are paid are the workers. And in some instances the owners, who have an emotional incentive to perpetuate a failing business, pump additional capital into it to keep it afloat - in which case the wages of labor are in part a gift from the owner who doesn't have the sense to put a dying operation to rest.
This extreme example also calls to mind the situation of any laborer who works with inferior tools and outdated facilities. In such instances, more is spent on labor for failure to make capital improvements (to provide better tools and facilities), which skews the impression of the value of laborer. The worker who use a dull axe creates less lumber, hence less value, than the worker with a sharp one. But at the same time he recognizes he is putting in a lot more effort and feels he deserves better compensation. This is the basis of the fallacy that it is effort, rather than results, that should be rewarded.
The farmer who works a barren field put in more exertion than the one who works fertile soil and reaps less profit - it is simply a natural consequence. The same can be said for a laborer who works for an inefficient firm: his greater exertion creates less product, hence less revenue to compensate those who contributed effort. The greatest profit goes to the firms that most efficiently serve the desires of the consumer - and their employees are better compensated as well.
There is mention of marginal contribution: if the most efficient supplier cannot meet the demands of the market, some customers will have to pay more for the work of less efficient suppliers. Hence there is a place in the market for less efficient suppliers. The same may be said of laborers: the most efficient supplier likely hires the best workers, and the less capable or proactive must accept lower wages from a less capable operation.
This all underscores the necessity of a free workforce in which employers are able to hire/dismiss at will and workers are able to join/leave at their will. Any interference in this situation means that the most efficient are not getting their due and the least efficient are often getting more, or damaging the productivity of an operation (hence the welfare of their societies). Labor, like any other product, is valued by the person who purchases it. The worker may feel he is worth a certain amount - but unless someone is willing to pay it, he is wrong. The employer may feel that a given wage is fair for a worker - but if someone else is willing to offer more for his workers, he is wrong.
The market for labor encourages men to the occupations that are needed to provide the goods demanded by society. Where there is a great need for metalwork, high prices are paid for products, high wages are offered to skilled workers, and men are encouraged to enter the profession. Should metalwork fall out of favor, there will be lower demand for products, lower wages for workers, and men will find that other professions are more rewarding. There is a tendency among men to take pride in their work, and to struggle to remain employed in a profession in which they are skilled - but their situation is just as foolish as the owner who struggles to prop up a factory that is no longer profitable.
The least skilled worker has the greatest freedom to change situation but the lowest wages. The more skilled workers get better compensation (provided those skills are in demand) but have fewer opportunities. The automation of industry has done much in this regard - because a machine-operator needs only a few basic skills (compared to a craftsman who fashions items by hand), there are many more people who are more mobile, but whose wages are only slightly higher than that of unskilled laborers.
There's some mention of the "zone of indifference" that is a by-product of the marginal utility of labor. When adding more workers generates more revenue than they cost, firms are interested in taking on more workers. When the cost of adding more workers is more or less equal to the revenue they generate, firms become indifferent to adding more workers. Few employers are foolish enough to hire to the point where additional labor costs more than it produces.
Then, a consideration of the way in which the demand for different factors of production causes the profits of a firm to be shared out differently. The demand for a return on investment capital, for example, must be satisfied in order to attract sufficient capital to operate a firm - and when capital is scarce and a higher return must be offered for it, this subtracts from the amount that is available to labor.