Follow the Money (Part 2)

Where do our wages come from?

Source: Wikipedia

As long as there has been work, there have been wages. Wages have been part of society from Ancient until the present. There are many references to wages in the Bible. Wages can be calculated by the task—a piece rate—or by the amount of time put in. Day wages were typical in the ancient world, but as soon as clocks were invented, hourly wages became more common.

Paying people by the hour has the virtue of being simple—if you don’t show up for work, you don’t get paid. But it also creates a conflict. It’s in the employer’s interest to get as much work out of a laborer as possible. But maximum effort isn’t always in the worker’s best interest. So wages always come with oversight—foremen and gang-bosses, usually paid a slightly higher wage—to keep the workers on-task and focused.

Still, wage-labor abstracts labor’s owners—the laborers—from the product of their work. When farmers cultivate a field of corn, the corn is a direct product of their work. It doesn’t matter how many hours they put in. What matters is that the job gets done. But with wages, businesses need to manage labor as one of many inputs into the production process. And they need to be sure they’re getting an honest day’s work for an honest day’s pay.

Because specialization brings benefits, most notably an increase in productivity. Ever since Adam Smith wrote about his famous pin factory in The Wealth of Nations we’ve understood that when everyone does what they do best—and trades their output for what others are producing—we’re all better off. It’s a win-win situation.

18th Century Pin Factory. Source: L’Encyclopedie

Wages create a conflict—perhaps the most basic conflict in economics—between those who own their labor—the workers—and those who use that labor—the managers. If firms want workers to act like managers, they need to find ways for them to share in the fruits.

Douglas R. Tengdin, CFA

Chief Investment Officer

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