Why Are Wages Stagnant?

Column for week of February 23, 2015

     Several recent articles lamented that wages aren't
increasing.  The authors were sure that wages needed to
increase for prosperity to return.  None of the writers showed
that they had a clue about why wages were stagnant.

     The clearest way to illustrate many economic principles
is by considering a simple barter economy.  There instead of
using money, all producers trade what they produce for what
they want.

     Money is a very useful tool for making trading easier. 
Still, money is only a tool.  The real substance of buying and
selling is that one individual trades what he produces for what
others produce.  A worker at a wheel factory trades the wheels
he makes for money.  When he spends money at the grocery
store he trades wheels for food.

     To discover where wage increases come from, consider
a wheat farmer in a barter economy.  He produces wheat and
trades it for things produced by others.

     The farmer grows 1,000 bushels of wheat.  First he
must pay for the materials, tools, land rent, etc. used to grow
the wheat.   This takes 800 bushels of wheat.  The 200
remaining bushels are the farmer's wages for growing the
wheat.

     The only way the farmer can increase his wages is to
have more wheat left after he pays his cost of production.  The
farmer could rent more land and work more hours to produce
more wheat.  This would increase his income.  It wouldn't
increase his wage rate any more than an employee working
more hours at the same pay per hour increases his wage rate.

     The farmer has two other options.   He might improve
his efficiency so that his cost of production is only 700 bushels
of wheat.  That would increase his wages by 100 bushels.

     The other option is to use the same resources but
change his method of production so that his yield increases to
1,100 bushels.  This also will give the farmer a 100 bushels
wage increase.

     The same principles apply to wage increases in our
money economy.  The only way to increase wage rates is for
workers to be more productive.  Without increased production
the wage pie remains the same size.  If some workers get
bigger pieces, others must settle for smaller ones.

     Believing that we need wage increases to increase
prosperity puts the cart before the horse.  We need increased
prosperity in the form of increased productivity to increase
wages.  The question we should ask is, Why isn't productivity
increasing?

     The avalanche of new government rules and regulations
increases the cost of production.  Far worse the threat of more
new laws and regulations discourages businesses from investing
in new more productive facilities.  Factories, mines,
warehouses, refineries, etc. don't pay for themselves until many
years in the future.  Businesses fearing that government may
pull the rug out from underneath are afraid to invest in new,
more efficient facilities.

     Much of the investment made in recent years has been
in wasteful, inefficient facilities subsidized by government,
such as ethanol, wind power, and electric vehicles.  Such
investments increase the cost of production.  Because of the
increased cost of production some workers are forced to settle
for lower wages.  The convoluted financing of such facilities
with subsidies, mandates, etc. makes it difficult to know which
workers are taking the hit.

     We may see a brief surge in wages due to the drop in
oil prices.  Don't mistake this for a return to prosperity.  It will
be at most a temporary blip.

     It will likely do more harm than good by distracting
attention from the real problem, government meddling with the
economy.  Until businesses are allowed to freely pursue
increased productivity and the profits that reward increased
productivity, wages will continue to stagnate.  And, millions
will scratch their heads and wonder why.  Meanwhile
government that caused the stagnation of wages will hurl
flaming darts at the businesses that government has denied the
means of raising wages.

aldmccallum@gmail.com
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Copyright 2015
Albert D. McCallum