Wage Rates as Affected by the Vicissitudes of the Market

Labor is a factor of production. The price the seller of labor can obtain on the market depends on the data of the market.

The quantity and the quality of labor an individual is fitted to deliver is determined by his innate and acquired characteristics. The innate abilities cannot be altered by any purposeful conduct. They are the individual’s heritage with which his ancestors have endowed him on the day of his birth. He can bestow care upon these gifts and cultivate his talents; he can keep them from prematurely withering away; but he can never cross the boundaries that nature has drawn to his forces and abilities. He can display more or less skill in his endeavors to sell his capacity to work at the highest price that is obtainable on the market under prevailing conditions; but he cannot change his nature in order to adjust it better to the state of the market data. It is good luck for him if market conditions are such that a kind of labor he is able to perform is lavishly remunerated; it is chance, not personal merit, if his innate talents are highly appreciated by his fellow men.

Miss Greta Garbo, if she had lived a hundred years earlier, would probably have earned much less than she did in this age of moving pictures. As far as her innate talents are concerned, she is in a position similar to that of a farmer whose farm can be sold at a high price because the expansion of a neighboring city converted it into urban soil.

Within the rigid limits drawn by his innate abilities, a man’s capacity to work can be perfected by training for the accomplishment of definite tasks. The individual — or his parents — incurs expenses for training, the fruit of which consists in the acquisition of the ability to perform certain kinds of work. Such schooling and training intensify a man’s one-sidedness; they make him a specialist.

Every special training enhances the specific character of a man’s capacity to work. The toil and trouble, the disutility of the efforts to which an individual must submit in order to acquire these special abilities, the loss of potential earnings during the training period, and the money expenditure required are laid out in the expectation that the later increment in earnings will compensate for them. These expenses are an investment and as such speculative. It depends on the future state of the market whether or not they will pay. In training himself the worker becomes a speculator and entrepreneur. The future state of the market will determine whether profit or loss results from his investment.

Thus the wage earner has vested interests in a twofold sense — as a man with definite innate qualities and as a man who has acquired definite special skills.

The wage earner sells his labor on the market at the price the market allows for it today. In the imaginary construction of the evenly rotating economy the sum of the prices the entrepreneur must expend for all the complementary factors of production together must equal — due consideration being made for time preference — the price of the product. In the changing economy, changes in the market structure may bring about differences between these two magnitudes. The ensuing profits and losses do not affect the wage earner. Their incidence falls upon the employer alone. The uncertainty of the future affects the employee only as far as the following items are concerned:

1. The expenses incurred in time, disutility, and money for training.

2. The expenses incurred in moving to a definite place of work.

3. In case of a labor contract stipulated for a definite period of time, changes in the price of the specific type of labor occurring in the meantime and changes in the employer’s solvency.

This article is excerpted from chapter 21 of Human Action: The Scholar’s Edition and is read by Jeff Riggenbach.