Labor is a service.
Is Labor a Commodity?—Labor, as a factor in production, receives its return in the form of wages. A generation ago it was customary to speak of labor as a commodity and to say that the worker “sold his labor” for wages. But labor is not a commodity. The seller of goods parts company with them when he makes a sale; the worker is inseparable from his work. The man who sells shoes cares not who wears them; but it makes some difference to the shoe-worker how and where and for whom he labors. No commodity, moreover, is so perishable as labor. The labor of one day will not keep for sale the next. Hence sales of labor, if we call them such, are in the nature of forced sales. In the case of nearly all commodities, again, the supply can be diminished by stopping production, thereby preventing a drastic fall in price. But the supply of labor cannot be so easily cut down. The analogy between labor and commodities is a poor analogy and it is much better to speak of labor as a personal service. Workers contract with employers for the giving of this service and should receive, in return, not only wages but various assurances as to the conditions under which the service is to be rendered. The Congress of the United States, in the Clayton Act of 1914, declared that “the labor of a human being is not a commodity or article of commerce” and that an organization of workers was not to be regarded, therefore, as a “combination in restraint of trade.”
The factors which cause wages to rise and fall.
Wages.—The wages of labor depend fundamentally upon demand and supply. But as the supply of labor is not susceptible to a quick and unlimited increase or reduction, wages depend principally upon demand. When there is an increased demand for economic goods, due to factors which have already been explained (see p. [40]), the quest for labor becomes more keen on the part of employers; better terms are offered to the worker; in other words wages go up and the conditions of labor are improved. When the demand for economic goods diminishes the contrary takes place, but in this case the decline in the rate of wages does not, as a rule, keep exact pace with the decrease in demand. Organizations of labor strive to keep wages up and often succeed, temporarily at least, in doing so. During the years 1918-1920, when the demand for economic goods expanded greatly, the wages of labor in the United States went up promptly all along the line. When the turn in the tide came, about the middle of 1920, wages began to fall slowly and their descent has been very gradual. Wages, thus, incline to follow the general course of prices but they show this tendency more clearly when prices are going up than when they are coming down. This is altogether natural, for higher wages conduce to a better standard of living, and when such better standard has been achieved there is objection to any lowering of it.
Nominal and real wages.
This suggests that a distinction ought to be drawn between nominal and real wages. Wages, of course, are not an end in themselves; they are merely a means which enables the worker to satisfy his wants. The real utility of wages depends, therefore, upon what they will purchase, and this, again, depends upon the general level of prices. Even if wages, reckoned in dollars, go up fifty per cent, the worker is no better off if the general level of prices also goes up fifty per cent. A worker’s nominal wages are what he receives in dollars; his real wages are reckoned in terms of purchasing-power. The rate of wages should always be studied, therefore, in connection with prices. An increase or decrease in nominal wages may mean much or it may mean very little.
The minimum wage level.
There is a limit below which real wages cannot fall. This is the point at which the worker can manage to maintain himself and his family. Just where this point is, stated in terms of money, no one can say. It varies in different parts of the country. Before the World War the statistics showed that half the adult male workers in this country were earning less than six hundred dollars a year, yet the standard of living among American workmen was higher than that of the workers in any other country. Today it is probable that these same workers are earning more than a thousand dollars. This does not mean, necessarily, that the standard of living has risen, for the amount of nominal wages needed to maintain the pre-war standard is greater because of the rise in prices.
How capital arose.
Capital.—Capital is the third factor in production. In primitive industry the application of labor to natural resources produced direct and almost immediate results. The savages who gathered nuts and caught fish with their hands, for example, gained the fruits of their efforts at once. But these direct methods of satisfying their wants did not carry mankind very far. It soon became apparent that men could produce economic goods more easily and more abundantly by indirect methods, that is by the use of tools, implements, machinery, and other labor-saving devices. These made possible the utilization of minerals and other natural resources which could never have been made to serve the wants of man without using the appliances of indirect production. So, as civilization developed, production came to be spread over a considerable period of time, until today it often happens that a whole year intervenes between the first step in production and the sale of the finished article. Consider the articles of daily use, clothes, shoes, furniture, books, and realize how vast has been the series of operations necessary to produce each of them! Many workers have contributed their share, and each of these has had to receive his wages long before the goods passed into the hands of the ultimate consumer.