Thursday, November 14, 2013

The First Law of Wages


The physical world is governed by many laws of nature. We ignore those laws at our peril. some laws of nature are difficult to ignore. The penalty for ignoring the law of gravity is usually immediate and often severe.

An individual may be exposed to lethal radiation for months, or even years, and not notice any consequences. That doesn't mean there won't be consequences. Consuming small amounts of arsenic may for a while seem to improve health. Then it kills.

Many laws of economics are as ridged and demanding as the laws of the physical world. Some of the laws of economics are merely extensions of the laws of the physical world. One of these basic laws of economic laws is, we can't consume that which hasn't been produced.

The first law of wages is a corollary of not being able to consume that which isn't produced. Total wages can never exceed total production. The use of money obscures this law.

Consider a barter economy where people trade things for other things. Employees are paid with some of what they produce. Part of what the employee produces is used to pay those who produce tools, supplies, etc. for the employee to use. It should be obvious that the total wages paid to the people producing axes can't exceed the total axes produced.

Using money to pay the employees doesn't change reality. Money is only a medium of exchange. The money will buy no more axes than were produced. Printing new money and doubling the employee's wages doesn't make any more axes. If the employee uses his increased wages to buy more axes, or anything else, someone somewhere must settle for less. Printing new money to pay the ax maker is the same as taking some of the axes used to pay other suppliers and giving them to the ax makers.

A frustrated bowler threw his ball out the window of the car onto the road. The ball bounced, hit the windshield of another car, and killed a passenger. As far as gravity was concerned the bowler suffered no consequences from his ignoring the laws of physics. The victim paid the price.

Like the law of gravity, the first law of wages can be ignored, but not violated. Someone will suffer the consequences.
Still, for ages politicians, often at the urging of voters, have ignored the first law of wages. The politicians are rewarded by getting reelected. Some of the voters temporarily benefit from higher pay.

The first law of wages dictates that someone must pay. Often that someone doesn't even realize he paid the bill for someone else's higher wages. Some pay through lower wages or higher prices. Others pay by being unemployed. Some pay through higher taxes. However the payment is disguised, someone always pays the full cost of all artificial wage increases engineered by politicians. The first law of wages forces someone to pay.

Any subsidy to get a business to produce in a way other than the most efficient one hurts someone through either lower pay, higher prices, or higher taxes. This includes all subsidies paid to lure businesses to a particular location, or to induce then to make a product they couldn't otherwise afford to make. The list includes subsidies to makers of movies, windmills, ethanol, electric cars and biofuels. The subsidies result in some workers being paid more than the value of what thy produce. The only question is, Who is paid less?

Union wage increases and minimum wage laws along with restrictions on imports and other government interference with free trade all prompt the first law of wages to force someone to pay. Pursuant to the law of supply and demand artificially high wages always increase unemployment. One of the dumbest things politicians do is increase minimum wages during a recession. Inevitably when anyone gets higher pay without increased production, someone, somewhere gets lower pay, or no pay.


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Copyright 2013

Albert D. McCallum

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