The Theory of Wages

Wages, succinctly defined, is payment received by an employee in exchange for the labor he/she supplies. It may be paid in goods or services but is customarily in money. The term in a broad sense refers to what is received in any way for labor, but wages usually refer to payments to workers who are paid by the hour, in contrast to a salary, which implies a more fixed and permanent form of income (e.g., payment by the month rather than by the hour). In economic theory, wages reckoned in money are called nominal wages, as distinguished from real wages, i.e., the amount of goods and services that the money will buy. Real wages depend on the price level, as well as on the nominal or money wages.

There is a school of thought that claims that the system of wages as we know it today developed as a direct consequence of capitalism's origins in the medieval ages. From medieval serfs and artisans who specialized in trades, wages marked the transition to free enterprise where the workers themselves "supplied" the capitalist labor without the limits imposed by their status.

But I have to disagree. I believe that the concept of wages is rather more ancient than merely a medieval innovation rising together with capitalism from the feudal system. In fact, the idea of a payment given for some act is an image clearly utilized in the bible (cf. Matt 20:8, Luke 10:7, Rom 6:23, etc.). Indeed the parable of the vineyard laborers in the 20th chapter of the gospel of Matthew clearly captures the free labor system of which wages originated, but with a paradoxically twist that often characterizes Christ's parables, paradoxes which will certainly attract the ire of labor unions.

Thus the paradox "So the last will be first, and the first last" may also refer to the confusion of which came first, the medieval system of feudal serfdom or the capitalist system. The insistence that capitalism developed from medieval society is I believe a flawed notion. A careful perusal of the gospel text shows a fairly modern framework of capitalism for we find an interaction between first, an entrepreneur, the vineyard owner, who put together the necessary factors of production, and second, the workers, acting as free agents who supplies the labor for the vineyard owner for a fixed wage. The idea of free agency is further strengthened in the text when it seems to allude to an absence of a prior, formal relationship between the vineyard owner and the workers.

Many theories have been advanced to explain the nature of wages. The first of them was the subsistence theory of wages, also called the "iron law of wages," which maintains that wages cluster around the bare subsistence level of workers. A wage rate much above the subsistence level causes an increase in the number of workers; competition will then lead to a depression of wages back toward the cost of subsistence. Wages that are below subsistence reduce the size of the working population; in that case competition will raise wages, but only up to the subsistence level again.

In the surplus-value theory as propounded by Karl Marx, the value produced by the worker in excess of what is paid in wages is called surplus value. The surplus value, exacted from the worker, constitutes the capitalist's profit. The wage-fund theory is that wages are advanced out of a fixed fund of capital, from which an excess withdrawal, either through legislation or through union pressure, will ultimately reduce the amount available for other workers. Any increase in wages would also have to be taken out of profits, and their reduction would cause a decline in savings, which provide the capital from which the wage fund is derived.

The marginal-productivity theory maintains that employers will only pay a wage that is, at most, equal to the amount of extra value added to the total product by one additional worker.

The bargaining theory modifies the marginal-productivity theory by taking into consideration other factors (e.g., laws and social and political changes) that might affect the determination of wage levels and by acknowledging that certain basic assumptions (equal bargaining power of employer and employee, free competition between the two, and mobility of labor) that characterize the marginal-productivity theory do not hold in our present economic system.