CHAPTER III--THE PRINCIPLES OF WAGES

Section 1. A knowledge of the forces governing existing wage levels essential in any attempt to work out a policy of wage settlement for industrial peace.--Section 2. Wage incomes determined by great number of forces. The three most important and constant among these stated.--Section 3. These three to be taken up in order. The volume of the flow of wealth in the country of the worker the first to be considered. Its relation to wages indirect, as all product is joint result.--Section 4. The scientific management theories of wages based on a misconception of the relation between the productive contribution of labor and wages. These theories merely an elaboration of one method of wage payment. They have perceived one important truth, however.--Section 5. The "group-demand" theory of wages as held by some trade unions, based on a similar misconception. Valid, sometimes, from group point of view; unsound from point of view of labor in general.--Section 6. The second important force determining wages is the relative plenty or scarcity of the different groups or agents of production. How this governs the share of the product going to wage earners.--Section 7.

Many important modifying forces to the influence upon wages of relative plenty or scarcity. The most important considered.--Section 8. The forces determining the sharing out of the product of industry summarized. The idea of normal equilibrium in distribution a mistaken one.--Section 9. A brief a.n.a.lysis of the factors which determine actual plenty or scarcity of the different agents of production at any one time.--Section 10. The third important force introduced--the relative plenty or scarcity of different kinds of labor. The existence of relatively separate groups of wage earners discussed. The nature of an investigation of the principles of wages.

1.--In the preceding chapter, an attempt was made to mark some of the broader tests which will confront any policy of wage settlement for industrial peace and to foresee the ends that must be accomplished. An effort was made to define some of the conditions of industrial peace. To what extent these conditions are attainable, and how they are to be sought, remains to be studied. The starting point of further study is a knowledge of the forces which govern the distribution of the product of industry at the present time in the United States--that is, a knowledge of the principles of distribution. Our intention, however, is to undertake that study only in so far as it is necessary to explain how wage incomes are determined. Such a partial study of the principles of distribution with the special purpose of making clear the factors that govern wage incomes will occupy the next two chapters. They will const.i.tute a statement of wage principles.

2.--The distribution of the product of industry between the wage earners and the other groups who share in it is a continuous process in which each group a.s.serts its own interests and purposes. Wages are settled through a series of separate bargains between the wage earners and the owners or directors of industrial enterprises. The outcome of these bargains, as regards wages, is determined by the interaction of a great number of circ.u.mstances or forces, some of which are relatively more constant and more important than others. We will begin our study of wage principles by considering those forces which are relatively the most important and the most constant.

These have been cogently summarized as follows: "... the volume of the flow of wealth in the country of the worker; the relative plenty or scarcity of different agents of production; the relative plenty or scarcity of different kinds of labor."[12] They may be taken up in the order stated, at the same time noting the way their action is modified and complicated by other factors.

One preliminary comment may be admissible. It is to the effect that there has been in the past a tendency to view the problem of distribution (and so, of wages) as if it consisted of making clear by a.n.a.lysis the balance or equilibrium of a few given and unchanging tendencies--which were deduced from human and physical nature. These forces furthermore, were frequently held to be universal; the conclusions based on them have often been likened to physical laws. Such a view obscures the fact that any a.n.a.lysis of distribution is but a description of the working of a particular industrial society at a particular time. To mistake what is a description of a particular society for a study of the action of physical laws has the effect of leading men to believe that the present must forever reappear in the future.

3.--The first factor, "the volume of the flow of wealth in the country of the worker," was never more under discussion than to-day, when from all sides demands are heard for the material means necessary to the realization of desires. As the matter is ordinarily put, the greater the product of industry is, the more there is for distribution among all.

The truth of this statement seems obvious. Yet in interpreting it into policy more than usual care must be taken lest it be forgotten that other things may make a larger contribution to satisfactory living than an increase in these possessions which make up the flow of wealth.

Instances are by no means lacking of increases of production obtained at the sacrifice of something more important to human life than the additional product secured. There is a "mean" here also between labor and leisure.

All this, however, reads like a lawyer's brief about a simple matter.

The greater the volume of goods and services resulting from the labor of society, the more there is to share out; and the greater in amount will the share of the wage earners be, even if their relative share is not increased.[13]

The volume of production depends upon the quant.i.ty and quality of each and every agent that a.s.sists in production, and upon the organization of the separate powers, and above all upon the progress of invention and of the industrial arts. It depends directly upon: first, the natural resources of the country--which are ordinarily summarized in economic discussion under the term "land"--"by land is meant the material and the forces which nature gives freely for man's aid, in land and water, in air and light and heat;"[14] second, the "acc.u.mulated provision for the production of material goods"--capital--which was discussed in the preceding chapter; thirdly, on the labor of men and women--on the degree of spirit, skill, energy and intelligence which characterizes that labor; fourthly, on the quality of leadership which manifests itself in industrial affairs, and the success with which the elements of production are brought into well directed cooperation; fifthly, on the progress of invention and the industrial arts.

The relationship between the volume of production and wages is indirect.

Though it is true that the larger the product, the higher wages will be, all other forces remaining the same, the connection between them is by no means simple or direct. That is because the wage earners share in a product to the making of which other agents contribute. In our present industrial system work is done under direction, and by the aid of tools and machinery; it is highly subdivided. It is impossible to determine the contribution to total production of any group of workmen, or of all workmen. The product is a joint result in which the part played by any one group, instrument, or factor of production cannot be traced. Who, for example, is able to say how much productive activities have been aided by the invention of the telephone and the growth of the telephone system? The problem of the distribution of the product of modern industry is so difficult and so much to the fore because so many different people contribute in some way or other to the product and have a claim upon it.

Wage incomes may be affected by changes in the volume of the product, no matter what the cause or nature of the change. If suddenly some new chemical fuel were discovered in the laboratory, or some business efficiency expert were to discover some formula which made motors go round, the labor now spent in coal mining could be turned to other tasks. The volume of economic goods produced would be increased. The product to be distributed would be greater, and wage incomes would rise.

A similar result would ensue if the magic formula of the expert endowed all workingmen with greater skill and energy. Any addition to or subtraction from the capacity of any agent of production tends to affect not only its own income, but that of all claimants. The reward of any one agent of production, for example, labor, depends not only on its own part in production, but upon the contribution of all other factors. A craftsman in the United States may be no abler than his fellow workman in France, but may receive twice his wage.

This line of reasoning must be qualified in one respect. There is some compet.i.tion for employment between the several agents of production.

Their relative efficiency will affect the demand for them, and so will also affect the share of the product each receives most directly. That is a phase of the subject that will be considered at greater length at another point.[15]

4.--Given an industrial society at work like the United States, producing each year a varied flow of commodities and services, the question arises as to what determines the share of that flow that goes to the wage earners. We have already seen that the larger the product is, the higher wages are likely to be. But what determines the sharing out? That is the next matter to be considered. First, however, let us examine briefly two theories of wages which are more or less current in certain quarters, and which are built upon partial or complete misunderstanding of the connection between wages and the work actually performed by the wage earners.

The first theory, or rather group of theories, is that to which some of the leaders of the scientific management movement have given their sanction. The central idea of this group of theories is that in the output of the wage earners, considered either as individual output or as the output of a small group engaged on a common task, is to be found the final and just measure of wages. It is frequently a.s.sumed in the course of the reasoning used in support of these theories, that wages can and should measure a separate contribution which the individual wage earner makes to production. The positive, although hazy, belief which ordinarily underlies the scientific management theories of wages can be perceived in the following quotation from a speech of one of the leading advocates of the movement. "There are two ways in which wages can be advanced. One is the natural method, the proper method, the beneficial method, the one that tends to the uplift of the world. That is to make the advance depend absolutely on the effort of the worker. When the worker delivers more, it is perfectly proper that the returns should go up. In other words as unit costs go down wages can very properly rise, and they should rise. Under these circ.u.mstances, the worker is tremendously interested in seeing that the unit costs go down. There is a regular mathematical law here. Only to a certain extent can the unit cost go down and only to a certain extent can the wages go up.... On the other hand, when you raise wages without any connection whatever with the unit cost you inevitably find that the worker takes his bonus in the form of more leisure...."[16]

At the risk of repet.i.tion, it may be remarked that the output of an individual or a group of individuals is of necessity but a contribution to a joint product, and is dependent upon many other things besides the effort of the individual. And, therefore, even if the view that each individual should get what he produces were found to be acceptable as a basis for distribution, any attempt to base wages solely upon considerations of individual or group output must rest on a false a.s.sumption. Any laws or principles for the determination of wages must reckon with a far wider and more numerous set of considerations than those taken into account by the scientific management theories of wages.

These can only be understood by a study of the economic facts and arrangements which govern distribution, and by weighing many questions of social and economic expediency. To talk about basing wages solely on the effort of the worker is to ignore the obvious fact that much of the most laborious work is the worst paid.

The exponents of scientific management have not discovered a law of wages; they have simply elaborated a method of wage payment. Mr. G. D.

H. Cole has expressed that well. "Clearly, although scientific management methods may reduce the possible margin or error in determining piece-work prices, they cannot altogether remove it, and even if the time that ought to be taken for a job is clearly established a further complication confronts us. All the time-study in the world cannot show how much ought to be paid for a job. It can only show at most the length of time a job ought to take. That is to say, it cannot determine what is to be the standard of living or of remuneration of the workers.... This, indeed, is only another way of saying that Scientific Management has only devised a further method of payment under the wage system."[17]

The exponents of these theories fell into the error of believing they have unveiled a law of wages because they grasped one important truth.

That truth is that where the productivity of labor is high, where labor is efficient, there is a greater chance, all other circ.u.mstances being the same, of securing high wages than when the reverse is the case. Or as the matter has been put in one of the reports of the U. S. Industrial Commission (1912-16) "A close causal relationship exists between productive efficiency and _possible_ wages. Greater efficiency and output makes _possible_ higher wages in general and better conditions of employment and labor."[18] (Italics mine). That the scientific management doctrine of wages consists of nothing more than a method of wage payment is clearly established by its failure to substantiate in practice its claims of furnishing a scientific and equitable method of fixing wage rates. On that point the same Industrial Commission reports that "In a.n.a.lyzing the wage fixing problem in connection with scientific management two matters are considered; one--the "base-rate" sometimes called the day wage, which const.i.tutes for any group of wage earners the minimum earnings or indicates the general wage level for that group, and two--added "efficiency payments" which are supposed to represent special additional rewards for special adjustments. The investigators sought in vain for any scientific methods devised or employed by scientific management for the determination of the base-rate, either as a matter of justice between the conflicting claims of capital and labor, or between the relative claims of individual and occupational groups."[19] As a method of wage payment, of course, the method of scientific management must be judged by its good and bad effects like other methods of wage payment. That, however, is not a task which need detain us.

5.--The other group of wage theories that is based upon a similar misconception of the relation between the productive contribution of labor and wages cannot be so briefly dealt with. This is the group of theories which has been named "the fixed group demand theory" and it has figured prominently in most discussions concerning restriction of output. This group of theories also rests upon the a.s.sumption that there is a fixed relation between the productive contribution of a group of workmen and the wages received by these workmen.

The fixed group demand theory has been summarized as follows: "The demand for the labor of the group is determined by the demand for the commodity output of the group. The community--wealth and distribution remaining the same--has a fairly fixed money demand for the commodities of a group. It will devote about a given proportion of its purchasing power to these commodities, that is, if the prices of the group commodity are higher, it will buy less units and vice versa, but expend about the same purchasing power. Therefore, the demand for the labor of the group; profits remaining the same, is practically fixed, and increasing the group commodity output means simply conferring a benefit on the members of other groups as consumers without gain to the group itself. Therefore, to increase the efficiency and output of the group will not increase the group labor demand, and group wages. Decreasing the efficiency and output of the group will not decrease the group labor demand and the group wage."[20] Or in simpler terms, that the community will want a relatively fixed amount of the product which the group helps to produce. And thus if the group reduces the time needed to make that product, it will not benefit and may even be harmed, because the services of some of its members will be no longer needed. And, on the other hand, that the members of the group will not be harmed by keeping the products of its labor scarce and high.

This line of reasoning, as held by some trade unionists, is valid on occasion, from the point of view of particular groups of workmen--especially during short periods. It is a fact that in many cases workmen employed in particular industries or occupations, may not be benefited and may even be injured by a display of extra effort or by the adoption of a new and more efficient method of production. The benefit of that extra effort or new method may not go _directly_ and _immediately_ to the group which makes the effort or utilizes the new method--it may not go to that group at all except in so far as they may be consumers of their own product.

The question of an adequate supply of new houses is at present a vexed one and is likely to remain so for some years. Therefore it makes a good ill.u.s.tration of the difficulties involved in the question under discussion. Suppose it were possible for all the labor employed in the construction of houses to increase their effort and accomplish, let us say, a third again as much as at present. Would that increase of effort repay these workmen--would they receive higher wages? It is not a matter that can be argued with certainty. The expense of construction would fall rapidly, unless combination among the firms supplying building materials or among building contractors prevented such a fall.

In the event that the cost of construction fell, there can be little doubt that more construction would be undertaken. Would the increased demand for construction lead immediately to an increase in demand for building labor sufficiently great to give employment to workmen who would not be needed on the old construction because of the increase in individual output? Would it be so great as to mean a more than proportionate increase in demand for building labor and a consequent rise in wages? Would its effect be felt immediately or only after the pa.s.sage of some months, during which a number of the building laborers would be without employment? What will be the effect on employment two years hence?

Looked at in this light, the skepticism of trade union groups in regard to appeals for an increase of effort is easy to understand. It arises from the simple desire of the group to protect their position in industry by the only means they possess. It is an att.i.tude strengthened in many cases by the memory of weeks without work and efforts ignored.

It is a bitterness, like to others, which men inherit from experience.

Yet it can be stated with emphasis, that from the point of view of the wage earners as a whole, and of all of society, that any consistent adherence to this group demand theory of wages would be mistaken and unsound. The use of improved methods of production by any group, the more efficient performance of their work, may not result in a quick fall in the price of the product they are engaged upon, though sooner or later it usually does. The fall in price may or may not lead to rapid increase in the demand for the product of the group sufficiently great to give employment to all its members, or increased employment; although that result has usually appeared in the long run also.

The fundamental fact is that the demand for the product of labor is ordinarily subject to indefinite increase. If labor is economized in one direction, the power dispensed with will be utilized in another direction. The community income of economic goods is a flow. Under our present system of division of labor each individual uses his share of the product (which he measures in terms of money) to buy the particular commodities, or to make the particular investments he desires. If he gets some commodities cheaper than formerly, he will buy more, or buy commodities he had not been able to buy hitherto or increase his investments. The demand of the community for the product of labor in general will ultimately keep pace with the supply of the product.

Economies in production throughout the whole industrial field mean that there will be more commodities to be shared out.

Thus, in spite of the fact that there may be, and often are, serious breaches of interest between particular groups of wage earners and society as a whole on the matter of increased production, there can be but one sound policy for labor as a whole. That is to strive to increase production up to a point where further effort would entail a sacrifice of welfare more important than that which the extra product might represent.

Such general theoretical propositions as the above, however, will never be sufficient to persuade particular groups of wage earners to take a different view of the interests involved. It is easy to understand Carlyle's contempt for the smug complacency with which such propositions have often been put forward, when he wrote, "New Poor Law: Laissez faire, laissez pa.s.ser! The master of horses, when the summer labor is done, has to feed his horses through the winter. If he said to his horses: 'Quadrupeds, I have no longer work for you; but work exists abundantly over the world: you are ignorant (or must I read you Political Economy pictures) that the steam engine always in the long-run creates additional work? Railways are forming in one quarter of this earth, ca.n.a.ls in another, much cartage is wanted; somewhere in Europe, Asia, Africa and America, doubt it not, ye will find cartage, and good go with you!' They with protrusive upper lip snort dubiously; signifying that Europe, Asia, Africa and America be somewhat out of their beat: that what cartage may be wanted there is not too well known to them. _They_ can find no cartage. They gallop distracted along highways, all fenced in to the right and to the left. Finally under pains of hunger, they take to leaping fences; eating foreign property, and--we know the rest."

The reasons are plain. First, because the fixed group demand theory is, after all, only one variation of the art of monopoly--though a variation in regard to which special conclusions may be drawn. Therefore, as long as monopoly is widely practised particular groups of wage earners will be likely to take advantage of whatever opportunities for monopoly may present themselves; even if it can be proved that the policy pursued injures the wage earners as a whole more than any other industrial group. Short-sighted selfishness will always arise in an atmosphere of distrust. If the wage earners, for example, believe that the product of their increased effort will serve but to add to the profits of rings or combinations controlling prices, they will not make that effort. They must be able to see that conscientious work really does contribute to the general good. And second, because at times, the general interest in effective production can only be served at the direct and serious expense of particular groups of wage earners. Such a situation arises, for example, when a skilled craft is faced with a revision of its processes that eliminates the need for skill, and results in the lowering of the wages of the group. This is a common event.

Up to the present, such conflicts between particular interests and the general interest in effective production have been solved by a trial of economic strength, and by time. The viewpoint of the wage earners is clearly put in a statement by the National Organizer of The Transport Workers Federation (Great Britain) before the Court of Inquiry held upon the subject of the wages of the transport workers. He maintained "that the industry ought to carry to a greater extent than it had done hitherto the responsibility for the unemployment that was peculiar to it. He had always been quite frank with the employers. If they wanted a ship speedily dispatched he would not do it, if that meant that his men would be thrown out of work."[21] That, however, is a method which results ordinarily either in a sacrifice of welfare or production, or of both. The worst results incident to these conflicts could often be avoided by making them the subject of joint discussion by all those whose interests are directly involved. Discussion might lead to working compromise which would protect the wage earners against too great or too sudden loss. Even under the best arrangements, however, such conflicts of interest will be far from easy to resolve satisfactorily; they will remain in the words of Mr. Cole "a question, not of machinery, but of tact and temper."[22]

6.--We may now turn to the main question in hand. What forces do govern the sharing out of the product of industry in the United States to-day?

What determines wage incomes? So far we have only examined the general proposition that the larger the product, the higher wages are likely to be, other things remaining unchanged.

The relative plenty or scarcity of the different groups or agents of production is a constant and important force in the distribution of the product of industry. From the perception of its significance, spring many of the loose statements of the action of "supply and demand," which are ventured as complete explanations of the wage situation. It is not possible to give a simple explanation of the part which relative plenty or scarcity does play in the determination of wages. For other forces which affect distribution act simultaneously with it, and all intermingle their results.

The influence of relative plenty or scarcity (to use an elliptic phrase) upon the outcome of distribution is easily understood if it is kept in mind that the distributive process is one of repeated negotiation and bargain. In this process each group or agent strives to get a high return for its services in production. There is a steady, though imperfect compet.i.tion between the various units of each and every group or agent for employment; there is likewise a steady, though imperfect, compet.i.tion for the use of the various units of each and every group or agent. These conditions require no elaboration.

It is in this process of compet.i.tion for employment, and compet.i.tion to employ, that the return to labor--wages--is decided, simultaneously with the return to each and every group or agent. The return to labor will be high if the employment of the ordinary worker, _as part of a productive organization_, adds considerably to the total of market values produced.

For if the ordinary wage earner, by his work, makes possible a considerable addition to the market values produced, compet.i.tion among employers for men will lead to the payment of high wages, and vice versa.

Now this last result will be largely determined by the relative plenty or scarcity of the various agents of production. If the productive organization has at its command a plentiful supply of capital; if in the community there are many men possessed of a high order of business ability; if then, labor for the commoner tasks of production is relatively scarce, the work of the ordinary wage earner will be a means of adding considerably to the total of market values produced. Or, as it is sometimes put, each use of labor will be an important use. Labor will be in great demand, and wages will be high. If the opposite conditions exist, the outcome will be reversed. In other words, there is a tendency for work to be highly valued when the number of men available for doing it is small and when the work is performed with the aid of highly perfected machinery, in a community in which able business men are plentiful. Each laborer will find his services easily sold for good wages; for his labor will be an important aid to production.

A word of warning should be added to this summary conclusion.

It does not follow that because the wage incomes of the individual laborers are high, the total relative share of the product which takes the form of wages will be high. The wages received by individual wage earners are no indication of the share of the product received by all wage earners. That depends not only on the return to each wage earner, but also on the total number of wage earners, and upon the number and return to each of the other agents of production. In China, for example, where most work is done by simple hand labor, wage incomes are low. But because the number of wage earners is great, and the amount of capital used is very small, the total share of the product that takes the form of wages is high. The opposite is true in the United States and England.

There individual wage incomes are relatively high. But because of the great amount of capital employed, and the great call for business direction, it is doubtful whether much more than half the total product is received by wage earners.[23]

7.--Moreover, any statement as to the influence of the relative scarcity or plenty of the various groups or agents of production, as unqualified as that just made must be incorrect. It gives no clew to the importance of interacting factors. Here, as elsewhere in economics, many separate causes meet to produce a result. The disentanglement of their effects is frequently so difficult as to make more than an approach to the truth possible. The part each cause plays often remains somewhat obscure. Yet without reckoning with these interactions not even an approach to the truth is possible. So it is necessary to proceed now to a brief study of the other influences which play a part in distribution; and which lead to results somewhat different from those just described.

First, account must be taken of the fact that the various groups or agents of production are not entirely complementary, as has been a.s.sumed up to this point. Their outstanding relation--that of cooperation in the production of a joint product--has already been studied. But there is also a measure of genuine compet.i.tion between them for the field of employment. An unusually clear and detailed example of the nature of this compet.i.tion is to be found in the report of the commission on "The Decline of the Agricultural Population in Great Britain." To quote "Many expedients, other than actually stopping the plow, were adopted to reduce the labor bill. But while manual labor has no doubt been economized to some extent by curtailing some of the operations which require it, the main cause of reduction is undoubtedly the extended use of labor saving machinery. This is referred to by the large majority of correspondents in all parts of the country. With the exception of the self-binding harvester, which was introduced into this country in the eighties, few machines for the performance of a specific manual operation have perhaps been invented since 1891 (unless milking machines, shearing machines, and perhaps potato diggers come within that category), but whereas twenty years ago labor saving machinery was fully employed by comparatively few, it has now become almost universal on all holdings of sufficient size to make its use practicable. The subst.i.tution of mechanical for horse or hand power, for mixed machinery, e.g., threshing machines, chaff cutters, pumps, etc., has taken place largely, although it has made comparatively little progress for tractive purposes. It may indeed, be questioned if steam is so largely employed in the cultivation of land as it was twenty years ago. But the displacement of manual labor arising from the greatly extended use of drills, horse hoes, mowers, binders, manure distributors and the like must have been in the aggregate very great and probably to this more than to any other single cause the reduced demand for farm laborers may be attributed."[24] As Professor Marshall has remarked of such cases of compet.i.tion for employment between labor and capital as this, the compet.i.tion is in reality between one kind of labor aided by much waiting, and another kind of labor aided by little waiting.

Nevertheless, the fact of compet.i.tion between the various groups or agents is a fact of no mean importance in distribution. As has already been suggested, the efficiency of the wage earners plays a part in determining their field of employment in this compet.i.tion for employment.

Secondly, the simpler statements of the action of the factor of relative plenty and scarcity, such as are represented by the marginal diagrammatic expositions familiar in economics, obscure the fact that distribution is a process in which human wills are actively engaged. The constant a.s.sertion of will is a real force in the working out of distribution. Each group with a claim to a share of the product, by organization, agitation, and other tricks of the market place strives to forward its interest. It explores, by pressure upon the price mechanism and otherwise, the full extent of the dependence of the industrial system upon it or its product, as when monopolists control prices, or a trade union strikes to enforce a wage demand. Each group or agent tends to favor or resist changes in laws, industrial methods, and inst.i.tutions according as it expects to be benefited or otherwise by the change. This may be seen in the discussions surrounding the introduction of the eight hour day, or concerning the limitation of immigration. However, it is a careless exaggeration to state, as is frequently stated, that the att.i.tude of groups to economic legislation must inevitably be determined by their economic interest.