The Wealth of Nations Chapter 8: Of the Wages of Labour

While some people enjoy their work more or less than others, it’s rare that someone would continue to do their work if they did not receive financial compensation for it, either because it’s no longer worth their time or because they would need to do something else to afford to continue their lifestyle. But people get paid very different wages (as we saw with the minimum wage worker and heart surgeon affording different amounts of pins), so here Smith writes about what influences the wages of someone’s labor. “The money price of labour is necessarily regulated by two circumstances; the demand for labour, and the price of the necessaries and conveniencies of life.” In other words, what an employer has to pay an employee is affected by the same supply and demand that influences the prices of goods and services. If all pin makers disappeared from the face of the earth except one, that individual surely would be able to make more money than they are now. Beyond this, the “price of the necessaries and conveniencies of life” means that if a job truly is only worth paying a salary of $1/year (being extreme to make a point), nobody who needs an income would be able to accept this, since the necessities cannot be afforded by such a little income. For Smith, both of these factors come into play.

Economically, strong wages are both the cause and effect of a nation’s increase in wealth: “The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth.” It’s a cycle of positive reinforcement where a worker can provide much value to an employer/owner, and thus earn a strong wage. With their high wage they can spend more, which enables those offering goods and services to the first worker to earn more, and on and on it goes.

For Smith, this best of all plausible options economically comes naturally as individuals look after their own interest. They do the most valuable work they can for the most amount of people, and are rewarded handsomely for it. As Smith says, “Where wages are not regulated by law, all that we can pretend to determine is, what are the most usual; and experience seems to shew that law can never regulate them properly, though it has often pretended to do so.” Having third parties not involved in the individual transactions that make up a market skew the prices and wages, resulting in a less than optimal economic interaction. Maybe one party comes away with a better deal, but it leaves the other with a worse deal. When this is done at the expense of the individual providing the good or service, it incentivizes them to shift to a different industry with less regulation, or simply to produce less since the costs are higher to them. But when we allow these exchanges to happen freely between two parties, people find a price that one is willing to pay and the other is willing to charge. Here wealth is created for the individual, which spins out further into society to generate more wealth.

Let us know

• Over your lifetime, what good or service costs more hours of your labor to afford?

• Over your lifetime, what good or service costs less hours of your labor to afford?

  
  

Until next time, happy reading!