August 20th, 2015
Have A Question?
I recall earlier in my life when I worked at a university for a salary. During my years there, I received raises in salary; but I began to notice my pay increased, slowly, while I was working harder and producing better and better results. My colleagues received about the same pay (and raises) as I did, even though (at least as I saw it) I was producing more (by working harder and smarter). So I resigned and started my own practice. Although I no longer had a guaranteed salary, my earnings would more closely track my efforts and performance. So what am I getting at with this? Labor is a scarce resource with alternative uses, and like anything else, it should find its most valuable usage.
As I have pointed out, economics deals with the allocation of scarce resources (which have alternative uses). In a free market, these scarce resources are allocated to their most valuable uses when prices reflect the unique preferences of individual producers and consumers in the economy. The quantity of any product or service supplied (or demanded) by producers and consumers, is affected by price (higher prices induce producers to make more and consumers to want less, and lower prices induce producers to make less and consumers to want more). This dynamic process provides the incentives for prices to move toward the level at which supply meets demand (at which point the allocation of scarce resources has created the maximum amount of satisfaction for society).
Although labor markets work the same way as markets for other goods and services, for some reason, different labels are used when workers and wages are discussed. Also, discussions around wages, income and inequality seem to provoke emotional reactions (I think, because the subject involves peoples’ livelihoods). So I am probably going to get some of you upset here, but let me try and translate the labor markets in terms we have already discussed.
Wages are the price of Labor. Workers are the producers (supplier) of labor. Employers are the consumers of Labor. The supply of labor increased with price (wages). The demand for labor decreases with price (wages). The point at which the price (or wage) at which the supply and demand of labor meet, is where the most optimal allocation of labor (which has alternative uses) occurs (the welfare of society is at its highest).
Just like with other markets for good and services, if prices (wages) are too high (above the market determined level), there will be a surplus of labor (unemployment). If wages are below the market-determined level, there will be a labor shortage. In a free market, competition for labor—when there is a shortage—will provide an incentive for employers (consumers of labor) to offer a higher price (wages) to workers. If there is a surplus of labor, workers (producers of labor) will offer employers better terms (i.e. will work for a lower wage to get a job). This competitive dynamic moves prices toward the market-determined level (at which society has maximized its benefit from labor available).
Some folks have argued that workers are not always paid what they are worth. In a competitive market, this cannot be the case. Employers are willing to pay up to the level of productivity of each worker. This means that workers are paid to their level of value they add to the employer’s business. If employers pay less than this value, other employers will steal their employees, because they can afford to hire them (to that level of value the employee would add to their business). Employers cannot pay above the actual value an employee adds to the business; otherwise, the employer will lose money paying the worker and eventually go out of business.
Just like other products and services, not all labor is of the same quality. Some workers have more skills, experience, education that may make them more productive and valuable than others. Likewise, using equipment (capital) and technology in conjunction with labor can make workers much more productive. Nonetheless, employers will compete for (through wages) workers of similar productivity, until the point where pay equals the value added to the business enterprise. Although the particular skills and experiences of workers differ dramatically (making it hard to prove whether every worker is paid what they are “worth”), a free and competitive labor market is the most effective way to ensure wages are most appropriate for the work accomplished.
Unfortunately, labor markets seem to be plagued with more anti-competitive circumstances than other markets (probably because pay is so emotionally charged–as I mentioned earlier–therefore, fodder for political intervention). The first competitive check on employers (forcing them to pay employees what they’re worth) is the possibility that workers can quit and work for themselves (if wages are too low). However, regulations, complex business taxes and licensing requirements put up barriers to self-employment (can you believe that Interior designers, eyebrow threaders and hair braiders are a few of the occupations that require spending thousands of dollars to get a license?) (http://www.businessinsider.com/ridiculous-regulations-big-government-2010-11).
Also, workers may be stuck at their current job (at a lower wage than they could get if they competed for higher pay), because they need the employer’s health plan or they will have to send their kids to a crappy school in the location of potential new jobs (yes, an absence of school choice hurts wage opportunities).
Remember, the world we live in is not perfect. What we can strive for is the most efficient allocation of scarce resources to their most valued use. A competitive labor market is the best way to make sure all workers are compensated for their highest value possible. Anti-competitive labor practices simply benefit some workers at the expense of others (and the harm done to some is greater than the benefits to others).
So remember, you are a product in the market place. The more value you bring to the table, the higher the price you can sell your product. And, never stop adding value to your product. The more you learn and can do, the more flexible and valuable you are to an employer (your customer). Therefore, if it came to choosing between two employees doing the same job, the one who can add more value to the company will always win that sale. Whether you choose to sell your product to an employer (for a wage) or to the public (as a business owner), the price you can charge will always come down to the market price for the value you offer.
Personally, I much prefer to compete for my income–it’s the best way for me to earn as much as I am worth. Make yourself as valuable as possible to your employer or your customers, it is important for The Future of your Wealth!