Wages, Benefits, Entitlements, and Growth
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I present here a few paragraphs on wages and benefits, an excerpt from Human Action, a work by the famed Austrian economist Ludwig von Mises, who is the intellectual godfather of F.A. von Hayek, among other notables. I find it especially relevant because I have been working in Haiti for the past couple of weeks, my firm having won a contract to conduct a pre-feasibility study for an industrial park in the northern part of the country, which will accommodate garment manufacturers.

The park could ultimately employ as many as 75,000 workers which, given Haiti’s demographics and social structure, could provide income to more than half a million people. The question of garment factories is highly emotive, because garment workers are often among the lowest-paid workers in an economy, and the popular image of dark and dirty sweatshops prevails. Western consumers often feel queasy about buying clothing made in poor countries – though they don’t stop buying them – while labor unions vigorously protest the shift of garment factories from the U.S. to places like Haiti or Vietnam or Bangladesh. The so-called sweatshops remain fairly warm – they are in the tropics, after all – but the newer factories tend to be clean, well-ventilated, well-lighted, and generally decent places to work. Buyers from WalMart and Levi’s and Gap would accept nothing less. The garment assembly jobs are boring and repetitive, but they are far better and far better paid than those of the masses of people who work in subsistence agriculture or peddle cell-phone top-up cards on the street. Some of my great grandparents when they got off the boat in New York a hundred years ago went to work in the garment factories of the Lower East Side, and in those days they really were sweatshops, and they got out of there as soon as they could, but those jobs were indispensable as a first rung on the economic ladder. The same opportunities should not be denied to desperately poor Haitians just because we would not want to work in those factories ourselves.

However much well-intentioned people would like to impose conditions on imports from poor countries to ensure that workers are paid a living wage and enjoy some social benefits – health care, lunch, housing, retirement – the reality is somewhat harsher, and it applies equally in Haiti and the U.S. Let’s leave it to von Mises to explain the rest:

“What the employer buys on the labor market and what he gets in exchange for the wages paid is always a definite performance which he appraises according to its market price. The customs and usages prevailing on the various sectors of the labor market do not influence the prices paid for definite quantities of specific performances. Gross wage rates always tend toward the point at which they are equal to the price for which the increment resulting from the employment of the marginal worker can be sold on the market, due allowance being made for the price of the required materials and to originary interest on the capital needed.

“In weighing the pros and cons of the hiring of workers, the employer does not ask himself what the worker gets as take-home wages. The only relevant question for him is, What is the total price I have to expend for securing the services of this worker? In speaking of the determination of wage rates, catallactics always refers to the total price which the employer must spend for a definite quantity of work of a definite type, i.e., to gross wage rates. If laws or business customs force the employer to make other expenditures besides the wages he pays to the employee, the take-home wages are reduced accordingly. Such accessory expenditures do not affect the gross rate of wages. Their incidence falls entirely upon the wage-earner. Their total amount reduces the height of take-home wages, i.e., of net wage rates.

“It is necessary to realize the following consequences of this state of affairs:

  1. It does not matter whether wages are time wages or piecework wages. Also where there are time wages, the employer takes only one thing into account; namely, the average performance he expects to obtain from each worker employed. His calculation discounts all the opportunities time work offers to shirkers and cheaters. He discharges workers who do not perform the minimum expected. On the other hand a worker eager to earn more must either shift to piecework or seek a job in which pay is higher because the minimum of achievement expected is greater.Neither does it matter on an unhampered labor market whether time wages are paid daily, weekly, monthly, or as annual wages. It does not matter whether the time allowed for notice of discharge is longer or shorter, whether agreements are made for definite periods or for the worker’s life time, whether the employee is entitled to retirement and a pension for himself, his widow, and his orphans, to paid or unpaid vacations, to certain assistance in case of illness or invalidism or to any other benefits and privileges. The question the employer faces is always the same: Does it or does it not pay for me to enter into such a contract? Don’t I pay too much for what I am getting in return?
  2. Consequently the incidence of all so-called social burdens and gains ultimately falls upon the worker’s net wage rates. It is irrelevant whether or not the employer is entitled to deduct the contributions to all kinds of social security from the wages he pays in cash to the employee. At any rate these contributions burden the employee, not the employer.
  3. The same holds true with regard to taxes on wages. Here too it does not matter whether the employer has or has not the right to deduct them from take-home wages.
  4. Neither is a shortening of the hours of work a free gift to the worker. If he does not compensate for the shorter hours of work by increasing his output accordingly, time wages will drop correspondingly. If the law decreeing a shortening of the hours of work prohibits such a reduction in wage rates, all the consequences of a government-decreed rise in wage rates appear. The same is valid with regard to all other so-called social gains, such as paid vacations and so on.
  5. If the government grants to the employer a subsidy for the employment of certain classes of workers, their take-home wages are increased by the total amount of such a subsidy.
  6. If the authorities grant to every employed worker whose own earnings lag behind a certain minimum standard an allowance raising his income to this minimum, the height of wage rates is not directly affected. Indirectly a drop in wage rates could possibly result as far as this system could induce people who did not work before to seek jobs and thus bring about an increase in the supply of labor.”

In other words, most attempts to inflate people’s wages by requiring companies to offer non-wage benefits generally result in a reduction in wages. In a more or less free market, wages will find their own level, and it is only by rigging the market, allowing unions to create artificial shortages of labor or allowing big corporations to exercise near-monopoly power so they don’t care much about their cost structure (the United Auto Workers and the Detroit car makers are a prime example) that these iron laws can be suspended for a time.

Posted 08-02-2010 3:56 PM by Charles Krakoff