The Principles of Economics, with Applications to Practical Problems

by Frank A. Fetter

Labor employed on products exchanged

4. The payment of the laborer to produce goods for exchange is the most common modern case of wages. The relation of wages to the value of the product is in this case more complex, for the employer is directing the labor to gratifying the wants of others, not his own wants. It is the desire of prospective customers for the product, and the chance of exchanging it, that will eventually enable the employer to recover the amounts paid to laborers. Labor is only one of the elements entering into the product. Within limits it may be substituted for the other elements, fewer machines being used and more laborers, or vice versa. No more will be given for any labor than it is expected to add to the value of the product. As employers test by experience the contribution of the marginal labor to the value of the product, labor is constantly compared with the value of other things.

When industry becomes complex, the connection between the wages and the value ultimately realized in the product may be broken for a time, but rarely for a very long time. Because of miscalculations, labor is employed on things that prove to be quite valueless, and on other things that have a much greater value than was expected. When months or years intervene before the value of the labor is realized in the sale of the product, the employer must forecast the outcome as best he can, and employ labor only when the wages promise to be recovered. These are complicating facts, but in any logical view they do not falsify the principle that wages are determined by their prospective contribution to the utility of goods.

Various methods of remuneration, but one general rule

5. The wages paid by the various methods of remuneration—as, by time, by the piece, by premium for output—all conform in a general way to the economic value of the service. Many methods are employed to measure the services of wage workers. If time is used, a general or average output is assumed, and the workman must come up to that standard if he is to hold his place. If payment is by the piece, the price per piece must be enough to make possible the prevailing time-wage to workers of that grade if the supply is to be maintained in that industry. The convenience of the different methods of payment varies from industry to industry, and even from task to task within the same factory, so that now one, now another method is followed. In any case, however, the aim is to find some convenient measurement of the rate of labor, and of its contribution to the value of the product.

§ III. WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE

Ratio of exchange of services adjusted to their marginal utility

1. Each grade of labor is a potential supply of desirable things and its wage is determined in essentially the same way as if it were an actual supply. If all the various psychic goods that labor produces were spread out before men in visible form, some would be in great demand, some would exchange in a very unfavorable ratio with others. The exchange would come to equilibrium at a point where each buyer had adjusted his supply of enjoyments in the most favorable way, had so distributed his purchasing power as to get those kinds and amounts of services which afford him the highest possible sum of enjoyment.

Differences in wages persist

In this situation the real wages of some being so much more than those of others, the low-paid workers will have a motive to change their occupations. But the various laborers have limited abilities and cannot change at will and, despite the unfavorable ratio, they may be compelled to continue at the same work. Just as apples cannot become peaches or sheep become horses when there is a change in their price, so the unskilled workman cannot become skilled quickly, if he ever can, and the possibility of changing occupations within any reasonable period is very small indeed. Labor is constantly trying to adjust itself, to get into the better-paid industries. It moves, it emigrates, it seeks training and education. Especially the workers between the ages of fifteen and twenty-five choose the callings that promise the highest reward. Within limits an adjustment is possible, but these limits are not wide and not quickly shifted, and the wages of labor continue diverse in different occupations for an indefinite time.