What Is the Value of Labor?

By Steve Gillman - October 8, 2012

On a blog I once operated I used to ocassionally write about the value of labor or about what constitutes fair pay, and I often got negative feedback from labor activists and others. They may have assumed that I was a heartless Republican (some said as much). I am not nor have I ever been a member of the Republican Party, or of the Democratic Party, or any other. 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 do not 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 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 will 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 many of the employees are making just $8 per hour. Is that fair pay? What is the value of their labor? 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, I recently witnessed one of our favorite restaurants fail. 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 $3-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: the profit.

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--most 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 does 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 it is unfair.

Then there are the other issues that are rarely discussed. How much does a worker actually produce 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.

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 and 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 half of the population. The inventor will not invest his time and money if he is paid nothing, of course, but there is more to this than 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 largely 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 are likely to be more fair than any government policies could arrange. The truth is that 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 the rest.

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.

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Value of Labor