What Is the Value of Labor?
By Steve Gillman - October 8, 2012
On a blog I used to own I would occasionally write about the
value of labor or about what constitutes fair pay, and I often
got negative feedback from variety of directions. A few readers
thought I was a heartless Republican, and some said as much.
Others thought I was too hard on business people, and so probably
a liberal. I am not nor have I ever been a member of the Republican
Party, or of the Democratic Party, or any other political organization.
But I also don't think all Republicans or all Democrats are heartless,
and my wife does not think I am.
I do think that workers should be paid fairly, but I don't
think it is so easy to determine what the value of labor is in
a particular context. Many times it seems that activists make
the assumption that everyone knows exactly what a man or woman
should be paid, which is the amount they argue for, of course,
and that all who disagree are somehow against the rights of workers.
It is also common to attribute nefarious intentions to business
owners who want to have affordable labor.
Let's take a quick look at this, not so much to provide any
definitive answers (there are few to be had as you'll see), but
to suggest that the answers are not easy and the differences
of opinion are not automatically indicative of evil intent. It
is, after all, entirely possible to disagree without any intention
to do wrong to anyone, nor any intention to deny the "truth."
Let's start with an example of a labor-intensive business,
like a restaurant. I will throw some numbers out there, but there
will be plenty of real life examples of larger or smaller profit
margins and higher or lower wages. We will suppose that our example
restaurant has revenue of $400,000 per year, net profits of 15%
or $60,000 per year, and the total labor costs of $150,000 per
year, which means the other expenses total $190,000 for the year.
Now, let's suppose that most of the employees are making just
$8 per hour. Is that fair pay? What is the value of their labor?
Who knows, but let's say we raise everyone's wages by 50% so
those low-end employees are now making $12 per hour. Is that
fair? Is there really a number that can somehow be logically
"proven" to be fair? I doubt it. But in this case,
they still are not making much, and yet now the restaurant is
headed for bankruptcy. A 50% increase, after all, means an additional
$75,000 annually in labor costs, which more than eats up the
$60,000 profit the restaurant owner was making.
By the way, one of my favorite restaurants recently failed.
It was not because of high-labor costs, but on the other hand,
even had they been able to squeak by with the lowering of other
costs, they almost certainly could not have paid more to the
employees. If you actually run the numbers, you'll find that
there are many businesses -- even ones that make millions in
profits -- where a $4-per-hour wage hike would close them down.
Of course, in our example, our owner could have raised wages
a more modest 10%. That would cut his profit to $45,000. I personally
would not accept the stress of running a restaurant for that
amount. That brings up yet another difficult question: What amount
of profit or percentage return is morally acceptable to you the
reader? Do we as outsiders have a right to say that a woman who
owns, let's say an appliance repair business, can only make this
or that amount of money for her efforts?
Now, as a practical matter, the value of labor cannot exceed
the net value after all other costs of whatever product or service
is produced. In other words if all other costs for a lawn mower
manufacturer come to $1.4 million dollars, and they can generate
$2 million in sales, the labor costs clearly can't exceed $600,000,
or the business would be losing money. Of course the labor costs
can't even be near that, because neither you nor I nor any investor
will start or invest in a company without something to be gained:
What is a person's labor worth? It depends on what they are
doing, what the net value of the production is, and many other
factors -- some of which cannot be easily pegged.
Now, as to the idea that a businessman who wants to hold down
wages is doing something wrong, just think about it for a moment
and you'll see that it is just the exact same self-interest that
has employees asking for more. Or imagine hiring labor yourself.
If everyone in the lawn cutting business is doing lawns for $25
in your area, would you really offer to pay $50 or $75 because
you think the wage is too low? I doubt it. Just as you want to
pay what the market asks and no more, so it is with a business
owner who is buying labor. There is not necessarily any bad intent.
This isn't to say that there are not underpaid workers and
overpaid executives. I'm surprised that some of these top corporate
guys who take home huge bonuses -- even for lousy performance
-- aren't being thrown out on the street by their shareholders.
But that is another matter, best addressed as its own subject
(the whole corporate/public stock ownership system probably needs
to be thrown out eventually). And of course if one wage is promised
and a lower one paid that would be unfair.
Then there are the other issues that are rarely discussed.
How much does a worker actually produce by way of his own effort?
I agree with Abraham Lincoln when he says, "Labor is prior
to, and independent of, capital. Capital is only the fruit of
labor, and could never have existed if labor had not first existed.
Labor is the superior of capital, and deserves much the higher
consideration." It all starts with physical and mental labor.
But the mental part is often forgotten, and the general idea
as stated does not suggest easy answers to the specific questions
of who deserves what.
For example, if a man can harvest 300 pounds of potatoes in
a day, we could estimate what the value of his labor is after
pricing the potatoes and adjusting that figure for costs and
whatever profit we think the owner of the farm is due. Let's
just say his labor is worth $10 per hour. Then along comes an
inventor who sells the farmer a new machine (a tractor, let's
say), which makes it possible for that one man to harvest much
more in the same amount of time. In other words, there is more
value produced per hour of his labor, but is it his labor that
produced that additional amount, or was it the mental labor of
the inventor as well as the mental labor and capital of the farmer
who invested in the new machinery?
We can say this: Technological advances can cause the total
amount of value in the world to rise, and so have the potential
to alleviate poverty, so we shouldn't want to discourage such
progress. Using the technology and techniques of a hundred years
ago we would probably be producing only enough food for a third
of the population we know have. The inventor will not invest
his time and money if he is paid nothing, of course, but there
is more to this matter than just that. If we were to say that
the farmer is only allowed x dollars of profit, he would have
no reason to buy the new equipment. He does so to make more money.
Take that possibility away and the whole world is poorer.
So how much is just the raw labor of the worker worth? I don't
have an answer. Nobody really does in any defensible formulation
that can be "proven" to be correct. The price of labor
is negotiated between workers and those who hire them, and determined
also by what the consumers are willing to pay for products and
services. If fraud, lies or force are not used on either side,
the results might be more fair than any government policies could
arrange. Before there were any rigorous labor laws wages rose
with production and wealth in general, and even now that we have
a mandated minimum wage, more than 90% of employees are paid
at a higher rate than the law requires.
As an aside there is a growing divide between the wealthy
and the rest of us, but this has less to do with a lack of government
regulation in the workplace, and more to do with the use of government
by those with money. Tax law in particular has led to a shifting
of the tax burden away from the wealthy and onto the poor and
middle class in subtle ways that few see, and this has resulted
in the rich getting far richer while income has stagnated for
That, however, is yet another subject. My point here is simply
to make it clear that there is no obvious answer that all can
agree on as to the value of labor, and there is not necessarily
evil intent in others when they disagree on the particulars of
the questions raised.
Value of Labor