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Tuesday, October 29, 2013

Who Determines Wages?

Who determines wages? Is it the seller of a good or service? Is it the employer? Is it those nasty, greedy big businessmen, (sorry, businessperson)? I hate to break it to you, but it is none of the above. Want to hear a shocking statement? It is you, the consumer, all consumers in fact, who decide the wages of employees. "I do not believe you," you say. Let me show you, with the help of economist Ludwig von Mises.

You see, businesses sell a good or a service, created by spending and using the factors of production to create that good or service. Those factors of production: land, capital equipment, and human labor. Thus, according to Mises:

"Businessmen are under the necessity of turning out what the consumers ask for and they must sell their wares at prices which the consumers can afford and are prepared to pay. A business operation is a manifest failure if the proceeds from the sales do not reimburse the businessman for all he has expended in producing the article."

According to my Misean to English dictionary: if a business cannot at least recoup the money spent on the three factors of production because the consumer thinks the price is too high, then the business does not last. This means you, the consumer, by your absence of purchasing a good or service because of price, said, "The factors of production are too high; they must be lowered for me to buy your good/service." These factors of production include - guess what? - labor, or, wages, as we stated above. Or, to put it in Mises' words:

"It follows than an employer cannot pay more to an employee than the equivalent of the value of the latter's work, according to the judgment of the buying public, adds to the merchandise. (This is the reason why the movie star gets much more than the charwoman). If he were to pay more, he would not recover his outlays from the purchasers, he would suffer losses and would finally go bankrupt. In paying wages, the employer acts as a mandatory of the consumers as it were. It is upon the consumers that the incidence of the wage payments falls. As the immense majority of the goods produced are bought and consumed by people who are themselves receiving wages and salaries, it is obvious that in spending their earnings the wages and employees themselves are foremost in determining the height of the compensation they and those like them will get."

So there it is, with the help of Mises; consumers decide wages, (and other factors of production), by purchasing or not purchasing a product or service, based on a price they are willing to pay. No minimum wage law can change how you, the consumer, value a good or service, thus valuing one of the three factors of production, wages.

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