Earnings of labour

Book 6, Chapter 3

§1. This chapter looks more deeply into the factors (e.g., natural skills or experience) affecting wages, as later chapters will examine business profits and land rents.

§2. The prices of commodities vary with their quality or the terms of sale, so wages for (more irregular) labor will very more. Assuming a competitive labor market and similar capital inputs, then we will see a greater difference in wages between workers with different skills (i.e., efficiency). Put differently, wages will be equal for workers of different skill if laws prohibit wage discrimination or if there is little competition. More interesting (or counterintuitive), it makes sense to pay more to higher skilled workers because they can operate expensive machinery more efficiently and produce  more output per hour per machine than the less skilled.

§3. Real wages, unlike nominal wages (cash payments), depend on the cost of living and the mix of goods workers consume. (They usually care more for the price of bread than the price of opera tickets.)

§4. Gross wages do not translate into real wages as it is necessary to deduct the cost of education, special tools, and other expenses needed to do one’s job. In some cases, those expenses may include membership to a club, fancy clothes, etc. (My dad was a real estate agent in Southern California, where a fancy car is de rigeur.)

§5. The employee’s value of non-cash “wages” often differs from their cost to the employer, so it’s a mistake to assert their value based on cost, price or some other number. In some cases, the value is less than the cost; in others the opposite (read Marshall’s footnote on scams). It’s no problem that these matters affect employer-employee dynamics. It’s a problem when outsiders misunderstand how values, prices and costs affect decisions.

§6.  A 50% chance of earning either x or 3x is less valuable than 100% chance at 2x (cf. Book 3, Chapter 6). Entry-level workers will accept below-market wages if they can potentially be promoted to above-market-wage positions (young men often take these odds). To compensate for the “anxiety and worry of waiting,” irregular employment requires higher wages than steady employment.

§7. Besides the worker’s wages, it’s important to consider the situation (e.g., potential jobs and wages) affecting the worker’s family.

§8. The attraction of a trade — and thus its wage level — depends on the tastes, skills, background, social position of potential workers. Some are willing to accept jobs others won’t. After lamenting that “the progress of science has kept alive many  people who are unfit for any but the lowest grade of work” (p 464), Marshall explains that some jobs are kept dirty (not made attractive to skilled workers) employers know they can save money by hiring the lowest classes to do them. “There is no more urgent social need than that labour of this kind should be made scarce and therefore dear” (p 464).

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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