Front Page Titles (by Subject) Chapter XVIII: WAGE RATES AND CAPACITY - The Economics of Welfare
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Also in the Library:
Chapter XVIII: WAGE RATES AND CAPACITY - Arthur Cecil Pigou, The Economics of Welfare 
The Economics of Welfare (4th ed.) (London: Macmillan, 1932).
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
The text is in the public domain.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
WAGE RATES AND CAPACITY
§ 1. THE whole of the analysis of the three preceding chapters has been conducted without reference to the effects which interference to raise wages may produce upon the physique, mentality and morale, and so upon the efficiency of the workpeople. But, as we have just seen, certain industries exist whose operations require little or no skill, and in which even the normal so-called able-bodied workers are of an exceedingly low grade. In these industries—simple sewing at home is one of them—even a fair rate of wages, and, still more, an unfair rate, is necessarily an exceedingly low rate. In such industries it seems probable prima facie that interference designed to force up wage rates would react upon the capacity of the workpeople and so might indirectly increase the national dividend, even though the direct effects, taken by themselves, would have been adverse. The reaction to be expected is partly physical, resulting from increased strength due to better food and better conditions of life. It is also partly psychological, resulting from a sense of fair treatment, an increased feeling of hopefulness, and the knowledge that, with the increased wage, slack work is more likely to lead to a loss of employment. Hence, in occupations employing exceptionally low-grade workpeople—and an argument of the same kind, though of less force, can be advanced about those employing better workpeople—there would seem to be a stronger case for interference to raise wages than the considerations advanced in the preceding chapters by themselves indicate. This suggestion has now to be examined.
§ 2. It is sometimes thought that light can be thrown upon it by comparing the capacities of workpeople employed in occupations or firms where the earnings are high and low respectively. It is found that people who earn good money are very much more capable than those who earn bad money, and it is inferred that, if the latter were paid as much as the former, they would thereby be raised to their standard. This reasoning is inadequate. The fact that workpeople in high-wage districts are, in general, more capable than workpeople in low-wage districts does not prove that high wages cause high capacity; for there is available the alternative explanation that high capacity causes high wages. Nor does the fact that workpeople, who have moved from low-wage to high-wage districts, are soon found to be earning the wages proper to these latter districts prove this; for the people most likely to undertake such journeys are just those who feel themselves already more capable and worth a larger wage than their neighbours. All statistical arguments of the above type must be regarded with the greatest suspicion. In order to discover experimentally how increased earnings react upon capacity, we should need to investigate the output of the same individual workman in the same environment under both low-wage and high-wage conditions. It is only thus that we could ascertain the extent of the reaction which improved pay would produce in workpeople of different income grades. Unfortunately investigations of this kind are not available. The rapid improvement which took place in the appearance of the men recruited and trained for the new armies in the Great War does, indeed, suggest that human quality is more quickly and completely plastic, at all events in youth, than we had been accustomed formerly to suppose. The good effects, as reported by those who have studied them, of the increased wages that have been awarded by the Trade Boards in the tailoring and boxmaking industries point in the same direction.78 These things give ground for hope, but they do not enable us to formulate any precise conclusions. We are thus in the end thrown back on the vague guess-work called common sense. This suggests that the reaction will be most marked among work-people who are exceedingly poor, and in whom, therefore, there is large scope for physical improvement through better food, clothing and house accommodation; that it will vary with the age of the people affected and with their previous condition; that it is more likely to occur where employment is fairly regular, so that a definite standard of life can be built up, than it is among people whose employment is "casual" and intermittent; and that, the longer the improved payment lasts, the greater is the chance that capacity will benefit to an appreciable extent.
§ 3. In places and occupations, where wages are low because low-grade workpeople are being "exploited" by employers and paid less than they are worth, there is no reason to expect that the forcing of the wage rate up to a fair level will cause any of the people affected to lose their jobs for any length of time; for it will not pay employers to dispense with their services. Consequently, all that has to be considered is the direct effect upon the capacity of the people who actually receive the better wage. It is, therefore, practically certain that there will be some net benefit to the national dividend. Moreover, there is reason to expect that this benefit will be cumulative. If exploitation is allowed, and a bad bargain by workmen leads to a reduction of their capacity and so to a diminution in the value of their marginal net product, they will start for the next round of bargaining from a lower level; if they again get slightly the worse of the deal,'—and, being weaker, they are now more likely to do so,—they will again, in the same manner, be driven yet lower. Thus their capacity, as well as the wage they receive, is cumulatively and progressively reduced, and the national dividend suffers thereby a serious injury. If, however, exploitation is prevented and wages are forced up to a fair level, the benefit to capacity will start an upward movement exactly analogous to this downward movement. High earnings will lead to greater capacity; greater capacity will lead to the power of obtaining higher earnings, both because the workers' services are worth more and because, being better off, they are in a stronger position for bargaining; the higher earnings so obtained will react again to increase capacity; and so on cumulatively. This consideration is of special importance among those extremely poor workpeople, whose very poverty, so long as it continues, makes them easy victims to the superior bargaining power of employers. In these circumstances, therefore, the conclusion reached in Chapter XIV. that the national dividend will be increased by the forcing up of wage rates, which are rendered unfairly low by exploitation, is confirmed and enforced when account is taken of reactions upon capacity.
§ 4. In Chapters XIV. and XVII. it was shown that, in certain somewhat special conditions, the forcing up of wage rates, which are either already fair or are unfair from other causes than exploitation, would benefit the national dividend apart from reactions on capacity. A study of these conditions, as there described, makes it evident that, when any of them are present, the forcing up of wage rates may easily produce beneficial reactions on the capacity of the workpeople as a whole, and is extremely unlikely to produce injurious reactions. Here too, therefore, the indirect effects on the dividend operated through capacity are in line with the direct effects. When, however, conditions are such that, apart from reactions on capacity, the forcing up of a wage rate would damage the national dividend, the way in which these reactions will work is much more difficult to determine. The reason is that, in these conditions, some workpeople will be ejected from employment in the place or occupation where the wage is raised, and either reduced to unemployment or, at best, set to work where the value of their output is less than it was before. For, unless one of these things happens, the dividend will not be damaged, and we are now assuming that, apart from reactions on capacity, it is damaged. But, if some workers are made worse off than before, the net effect on capacity will not consist merely of benefit done to those who actually receive the better wage rate, but also of injury done to these others. Prima facie it seems reasonable to suppose that, if, after the increase of wage rate in one particular industry, the aggregate sum paid in wages throughout the grand total of industries is less than before, the aggregate capacity of the workpeople as a whole will not be enhanced. The conditions in which an increase of wages in a particular industry may increase the real earnings of wage earners as a body, in spite of damaging the national dividend, will be examined at length in the course of Part IV. It is evident that the prospects are best when the demand for labour in the occupation whose wage rate is forced up is highly inelastic. From the standpoint of a short period, which alone is relevant to reactions on capacity, the causes making for inelastic demand are, in general, much more powerful than they are from that of a long period. For example, if the wage of any group were forced up, employers would not generally dismiss many of their workpeople so long as existing orders were still in hand. If, then, the "reaction time" of wages upon capacity is fairly rapid, the chances of a favourable reaction may be taken, at all events when the commodity affected by the increased wage rate is not one largely purchased by working men, to be reasonably good. They are particularly so if the rate fixed for any group of workpeople is not raised suddenly much above the existing rate—in which event a large number of dismissals might take place—but is pushed up gradually by small stages. Hence, it may not infrequently happen that, in circumstances where, apart from reactions on capacity, the forcing up of a wage rate would inflict damage on the national dividend, the damage will be at least partially cancelled by these reactions. When a State authority is available to help people who may have been incidentally thrown out of work, the extra State contribution, which is an indirect effect of the forcing up of the wage rate, will make this cancelling benefit somewhat larger than it would have been otherwise. Whether the cancelling benefit will be large enough to outweigh the direct damage to the dividend, against which it has to be balanced, cannot be determined generally, but will depend on the detailed conditions of each separate problem.
§ 5. It should be added that, in any event, such interference to raise wages as is warranted by the considerations set out in the preceding section is essentially a temporary interference. Where wages are paid by the piece it is temporary in form as well as in substance. For, though an enhanced piece-wage, by providing larger earnings, may so improve a workman's capacity that he can produce more pieces in the day, and is thus enabled permanently to make larger earnings at the old piece-rate, it cannot cause him to become worth the new piece-rate. Hence, there is no case for retaining that rate for a longer time than is necessary for its reaction upon capacity to be completed—no case, at least, from the standpoint of the national dividend. If it is maintained for longer than this, it will add nothing further to capacity, but will injure the national dividend by preventing labour from distributing itself among different uses in the most advantageous manner. When wages are paid by time, the interference warranted is no longer temporary in form, and there is no reason why the enhanced time-wage should ever be reduced. But it is temporary in substance, because, after a while, the workpeople, in consequence of their improved capacity, will become worth the new time-wage, and, therefore, this wage will become the "natural" wage, for the maintenance of which no interference is necessary.
[78.] Cf. Tawney, Minimum Wages in the Tailoring Trade, pp. 121-34; and Bulkley, Minimum Wages in the Box-making Trade, p. 51. In the box-making industry the workpeople's capacity has also been benefited in an indirect way, because the enforcement of higher rates has induced employers to pay more attention to their training; "every worker has to be trained to earn the minimum, whereas formerly it did not matter how little they earned" (loc. cit. p. 51).