A Theory of the Rate of Wages

8/13/2019 A Theory of the Rate of Wages

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A Theory of the Rate of WagesAuthor(s): Walton H. HamiltonSource: The Quarterly Journal of Economics, Vol. 36, No. 4 (Aug., 1922), pp. 581-625Published by: The MIT PressStable URL: http://www.jstor.org/stable/1884753

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A 'THEORY OF T'HE RATE OF WAGESSUMMARY

Other theoriesof wages deal with other problemsthan that of rais-ing wages,581. -Sources from which increase of nominal wages maycome, 585.-How may the laborers command a share of these sur-pluses?605.- Increasingreal wages by loweringthe pricesof what thelaborer buys, 608.- The laborer's free income, 609.- Factors de-termininga wage rate in a given industry, 610.

I. THE inquiry, whose imperfect results find ex-pression below,' has had three objects.(A) The first is to find a theory of wages relevantto the problem of how real wages are to be raised.(B) The second is to push the explanation of wagesbeyond the composite abstractions of current theoriesand to formulate it in terms of economic factors amen-able to control.(C) The third is to establish a theoretical basis forquantitative inquiries into the possibilities of raisingwages in particular industries and occupations.II. The excuse for adding another to innumerabletheories of wages is the conventional one that they donot achieve these desired objects.(A) These theories, one and all, have their roots inother problems than that of raising real wages.1. The "iron law of wages" is an outgrowth of con-cern with the problems of "misery" and of "poverty."It proves that they are inevitable.2. The "wages fund" theory is a denial of theability of trade unions to raise the general rate of wages.

1. The argument which follows is presented in memorandum form because of thetentative character of its statement, the interminable length to which it would other-wise run, and the ease with which this form of composition lends itself to concise andarticulate expression. 581


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582 QUARTERLY JOURNAL OF ECONOMICS3. The "exploitation" theory is an attempt to finda philosophical justification for the claim of labor to"the whole of the product of industry."4. The "productivity" theory is, on its surface, astatement that in distribution laborers receive all thatlabor produces. Under analysis it becomes an argu-ment that, in buying labor and selling its product, theemployer cannot appropriate an "unearned" surplus

produced by labor. It is a "non-exploitation" theoryof wages.(B) The terms in which these theories are statedrender them irrelevant to the problem of how realwages can be raised.21. All of them, as ordinarily stated, carry ethical im-plications favorable, or antagonistic, to the prevailingeconomic order.2. Their final terms, e. g., "a wages fund," "supplyand demand," "specific productivity," carry with theman implication of the inevitability of wage rates estab-lished under the action of the assumed factors. Theymake the theory of wages almost an aspect of naturallaw.3. Their final terms are complexes of many specificfactors, much too conglomerate to be useful for pur-poses of control. A theory, adequate to the purpose,must get back of these general terms to the particularfactors which are their elements. So far as these ab-stractions are resolved by their authors, the only sourcesof wage increases which emerge are the efficiency oflabor, the savings of thrift, and the check upon thegrowth of population. Not only is this list too scantyto be suggestive, but it omits the sources of wage in-creases most responsive to control.

2. It is, of course, unnecessary in this inquiry to raise the question of the truth orfalsity of these theories.


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A THEORY OF THE RATE OF WAGES4. They make the theory of wages an aspect ofvalue theory. This leaves out of account items of in-come, such as compensation for accidents, supervisionof health, and educational opportunities, which are nopart of the pecuniary wage. Moreover, it directs at-tention to the process through which labor is evaluatedin the market rather than to the relationship of realwages to the tangible sources of wealth.(C) These theories furnish no basis for quantitativeinquiries concerned with the possibilities of raisingwages in particular industries. On the contrary, theyare quite self-sufficient. They require no resolution intoparts, no elaboration, no changes in factors or in em-phasis, and no qualification to be applicable to specificwage problems. In short they are irrelevant to the

problem of a conscious attempt to raise wages by a con-trol of the factors upon which wages depend.III. This approach to the theory of wages carrieswith it its own assumptions and method. Since thesepeculiarities are explicit in the pages which follow, nodetailed presentation of them is necessary. It is enoughto indicate here the salient features of the problem withwhich the theorizing below is concerned.(A) Its end is the elaboration of a theory of wages,at once scientific in basis and positive in character, yetrelevant to the various problems involved in increasingthe particular rates which make up "the wages struc-ture."(B) Its concern is to formulate a theory, not thetheory, of wages. The theory elaborated below isdirectly relevant only to the problem of how real wagesare to be raised. It has no direct relevancy to an ex-planation of wage rates in terms of native ability; thedifferentials in wage rates, with a lifetime as the term,paid in various occupations; the ethical merits of "the

583


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584 QUARTERLY JOURNAL OF ECONOMICSwages system," incomes from property, or "capital-ism "; or many other problems relating to wages. Eachof these requires its own theoretical attack. Since thereis no single problem of wages, there can be no exclusive"theory of wages" and no one "law of wages."(C) It assumes that wage rates are constantly beingredetermined in a developing industrial system, inwhich the efficiency of labor, the ability of management,the arrangement of work, the technique of production,the organization of units into an industry, and theconventions under which business is being done, areall undergoing change and are responsive to consciousmodification. This makes of the rates which con-stitute "the wages structure" variables in an economicsystem whose institutions are all variables.(D) It differs from the older theories in attemptingto reduce to reality, with a degree of specific detailwhich it is hoped is not incompatible with theoreticaldiscussion, the conglomeration of variables which intheir several degrees affect the rate of wages.(E) Its point of attack is the problem of raisingwages. An elevation in the rates which make up "thewages structure" (or, if you must have it so, of "thegeneral rate of wages") can be effected only by anadvancement of particular rates in the different oc-cupations and industries.(F) The advancement of a specific rate of wagesmeans the addition of an increment to the prevailingone. Hence this inquiry must begin with a considera-tion of the conditions under which a rate of wages in aparticular industry or occupation can be increased.(G) With this problem of how an increment can beadded to a prevailing rate of wages the four sections ofthe argument which immediately follow are concerned.This can be effected by (1) an increase in the nominal


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A THEORY OF THE RATE OF WAGES 585rate of wages (IV-V); (2) an increase in the purchas-ing power of the nominal wage (VI); or (3) an increasein the goods and services available to the laborer whichare not included in the nominal wage.3 The factorsupon which each of these depends are set forth in detailbelow.4

(H) There follows a translation of the theory of theincrement into a theory of the rate of wages (VIII), aconsideration of the relationship of rates of wages toeach other in "the wages structure" or through "thegeneral rate of wages" (IX), and some suggestionsabout wages policy which are implicit in the theoreticaldiscussion which is the main concern of this inquiry (X).IV. An increase in the nominal rate of wages in anindustry or occupation depends upon (1) the discoveryof a source for the increment and (2) the ability of thewage-earners in the industry or occupation to commandit against the competition of other groups. This sectionis concerned with the first of these two conditions.5

(A) The first general source of an increase in thenominal wage is to be found in price changes.3. Logically this discussion should occupy a single section of the argument. But to

simplify what is at best an elaborate explanation, each of these possible sources is dis-cussed in a single section (IV-V, VI, VII). For the same reason the first is divided be-tween two sections, concerned with the possible sources of an increase in the nominalwage (IV) and with the ability of wage earners to command these increments (V).4. A summary of these factors seems unnecessary here. The reader who wishes toget a perspective of the argument in advance has only to read first the main he'dings(IV-VII), then the first sub-headings under each (A, B, C), etc.5. This section is very roughly an abstraction of the suggestions of sources of a wageincrease for coal miners presented by various witnesses to the Coal Industry Commis-sion (British) in 1919. This represents the most persistent and most comprehensiveattempt with which the writer is acquainted to canvass the whole range of possibilitiesof wage increases offered by an industry. It is proper to defend the members of theCommission and its witnesses by saying that their sources of wage increases were allembodied in "practical" proposals and that none of them had the hardihood to elab-orate a theory of an increment in the rate of wages or to convert this into a generalexplanation of a basic rate in an industry or occupation. In their defense it must alsobe recordedthat in the process of abstraction many sources have crept into this accountwhich were not suggested before the commission. The liberties taken by the writer willbe familiar to all who have studied the testimony taken by the Commission. Others arereferred to the two million words of testimony "humbly submitted" "to Your Maj-esty's most gracious consideration" and duly recorded in the Reports and Minutes ofEvidence of the Inquiry conducted by the Coal Industry Commission, London, 1919.


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586 QUARTERLY JOURNAL OF ECONOMICS1. The cost of the increment in the wage may bethrown upon the consumer. This alternative is subject

to these limitations:(a) It is limited by the demand for the good. It isalmost impossible to find a good for which the demandis inelastic. A considerable portion of the supply ofeven the most necessary commodities is put to quitedispensable uses.(b) In some cases the cost of the increase can bethrown upon either the foreign or the domestic con-sumer to the exclusion of the other. If there is keenforeign competition, a tariff can be made to throw theburden upon the domestic consumer. If a country hasa practical monopoly of the industry, within limits theforeigner can be made to bear the cost.

(c) If a single good is sold to the public in manyvarieties, as, e. g., under the device of "class price," theincrement may be collected from the consumer of themore expensive (or, if you prefer, the less expensive)brands.(d) The policy of raising wages by passing the bur-den along to the consumer is likely to be at least par-

tially self-defeating. If generally employed it canraise wages only by the aggregate of the sum collectedthrough the excess in price from consumers who are notlaborers.2. The cost of the increment in the wage may betaken out of the investments in industrial equipmentin the industry. This alternative has also its peculiarlimitations.(a) The amount available for wage increases has itsoutside limit in the volume of dividends and profits.While in some industries, or at least in some industriesat some times, there is a considerable volume of profits,in general profits are too small in volume compared

with the wages bill materially to increase wages.


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A THEORY OF THE RATE OF WAGES(b) Pressure upon property incomes is likely toyield substantial returns only in industries which haverecently become monopolistic and in which propertyrights to surplus income have not yet become clearlyestablished.(c) Profits from capitalization not represented byphysical property offer an uncertain source for wageincreases. It is difficult, if not impossible, to disen-

tangle such equities from those that represent realproperty. In most cases such equities are "estab-lished" and have been transferred in genuine salesmany times.(d) The lowering of the general rate of interest offersthe possibility of a slight increase in wages. This iscontingent upon an increase in the volume of savings,a more plentiful supply of credit, or changes in thebanking customs and investment habits of the com-munity. It is beyond the control of the laborers in aparticular industry.(e) Pressure upon profits is even more narrowlylimited by the demand of the industry for more funds.If the increase in wages is to be maintained, eitherprofits must not be so seriously curtailed as to make itdifficult for the establishment or industry to attractinvestments, or some new method, other than depend-ence upon private investors and "the money market,"must be found to secure funds for expansion.(f) Pressure upon profits must not be allowed todeplete the surplus from "corporate savings" intendedfor reinvestment in the industry.3. The cost of the increment in the wage may betaken out of incomes from the ownership of "naturalelements" used in the industry. It is argued that sinceground rent, mineral rights, and the like are paid forthe use of non-producible goods, a reduction or an

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588 QUARTERLY JOURNAL OF ECONOMICSabolition of such incomes carries with it no threat toindustry. The limitations here seem to be these.(a) The ownership of such rights are tangled up withthe ownership of plant, equipment, "good will," andthe general equities of the properties within the in-dustry.(b) The total of such incomes, when disentangledfrom those accruing from investments in reproduciblegoods, is small in most industries. Even mineralroyalties are small in volume in comparison with thewages bill.(c) In most cases "natural elements" used in indus-try are subject to alternative uses. Under the prevailingsystem this fixes a definite limit to their appropriationfor the payment of wages.

(d) Even as regards minerals, so long as mines differfrom each other in productivity or location, some formof unification of the industry is necessary to an appro-priation of royalty charges.(e) Substantial gains from this source are dependentupon a willingness of the public to make, or to sanctionwhen made under the pressure of wage earners, changesin "the competitive organization of industry" and arevocation of property rights in "natural elements."4. The cost of the increment may be taken out ofsalaries paid in the industry. Here there are three pos-sible sources of waste, each offering its peculiar resist-ance to an attempt at its appropriation.(a) The first is salaries paid for duties which arenominal. The total saving from the elimination of allsinecures would be very small in comparison with thewages bill for an industry.(b) The second is salaries paid for the performanceof functions which while now real enough would beunnecessary under a different organization of the in-


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A THEORY OF THE RATE OF WAGESdustry. The possible savings from this source are notprimarily from price changes. They are contingentupon a reorganization of the industry which will be dis-cussed in its proper place below (IV, C).(c) The third is salaries in excess of the amountsnecessary to adequate performance of functions. It istrue that at present many salaries are more than enoughto furnish to their recipients incentives to do their bestand to supply them with all the instrumentalities es-sential to efficient work. Yet, under a system in whichindustries compete for executives and salaries are re-garded as indications of efficiency, a single industrycannot immediately cut from salaries their excesseswithout danger of weakening its personnel.5. The cost of the increase in the wage may bethrown back upon those from whom the industry re-ceives its materials and supplies. This possibilitypresents an alternative.(a) It may involve finding the source of the lowerprices, in part or in whole, in the wages bills of thesupplying industries. This is tantamount to raisingwages in an industry at the expense of wages in the in-dustries from which it draws its supplies.(b) Or it may involve finding the source of the lowerprices in internal economies in the supplying industries.This is raising for these industries the identical ques-tion of a wage increase through internal economieswhich is discussed for the industry in question below(IV, B).6(B) The second source of an increase in the nominalwage is an improvement in "the state of the industrialarts." This can be effected either through a develop-ment of the arts or through their better utilization.

6. Incidentally one cannot escape the question of why savings found through internaleconomies in the supplying industries should not be used to raise wages in the industriesin which they originate rather than be diverted to raising wages in an alien industry.

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590 QUARTERLY JOURNAL OF ECONOMICSEither will result in the production of the current out-put at a cheaper aggregate cost or in the production ofa larger output at the current aggregate cost. The im-portance of the surplus accumulated through an im-provement in the industrial arts as a possible source ofincreased wages 7 justifies a somewhat detailed analysis.1. A surplus may be created by increasing the effi-ciency of labor. It would be tedious to enumerate thevarious devices and methods by which this might beeffected. All that can be done here is to suggest theprincipal avenues of attack upon the problem and tosuggest the limitations to which each is subject.(a) A source of such increased efficiency is an im-provement in physique and in health. This involves aprogressive attack upon the problems of adequate nu-trition during immaturity, a proper subsistence wage,an effective regulation of health, and a preventionof a premature using up of human resources. Thesolution of these problems is arrested by the ignoranceof the great mass of people, by the short-term contractwhich prevents the employer from considering hislaborers as a long-time asset, and by inherited individ-ualistic notions hostile to a program for the conserva-tion of human resources.

(b) A second source of such increased efficiency isan improvement in the training and placing of laborers.This involves the problems of general and vocationaleducation; the distribution of laborers among the sev-eral industries and occupations; and the placing, train-ing, and promotion of laborers within the business

7. It is significant that the industrial community has no theory of how the new wealthcreated by the development of the industrial and economic arts is to be distributed.The shreds of such a theory exhibited in the patent system, private property, pecuniarycompetition, and like institutions, were formulated, so far as they were consciouslyformulated, without any clear conception of the problem of disposing of future and un-earned income made available by the "progress" of the arts. Needless to say suchwealth is all appropriated as it accrues but its appropriation bears evidence of no con-scious social design.


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A THEORY OF THE RATE OF WAGESestablishment. Such promises of increased personalefficiency are quite finite. Where the machine techniqueis established the great majority of tasks make use ofonly a fraction of the laborer's intellectual resources;the training for the task is short and simple; and thereis a tendency to reduce men to a dead level. In addi-tion the hierarchical organization of business reducesgreatly the number of positions requiring intelligenceand discretion.(c) A third source of such increased efficiency is tobe found in the better utilization of labor. Here be-long the familiar problems of hours of work, rest periods,inspection, "efficiency systems," methods of wage pay-ment, and the like.(d) A fourth source of such increased efficiency is areduction of absenteeism. This problem is largely oneof health and of morale. A serious decrease in thevolume of voluntary abstinence from employment mustwait upon changes in personal habits.(e) A fifth source of such increased efficiency is animprovement in the morale of labor. In this country themorale of labor is already high. How high it is is evi-dent in noting the fall in wages and the general economicruin which would attend any widespread practice ofsabotage. There is, however, too much of a negativeelement in labor morale. The industrial system bothhelps and hinders the solution of this problem. Whereindustry is mechanicalized, the machine sets the pace.There, except for absenteeism, a high morale on thepart of the worker is unnecessary. Where the older"indiscipline" remains, the separation of owner andlaborer and the impersonality of management createpsychological conditions which undermine morale.This mental distrust is increased by a price system andan irregularity in industrial activity which makes the

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592 QUARTERLY JOURNAL OF ECONOMICSdependence of wages upon the exertions of laborers anabstraction very hard for them to grasp.2. A surplus may be provided by increasing theefficiency of management. The importance of thisproblem may be indicated by visualizing two industrialsystems alike in every respect save that one is mannedby a first-class and the other by a third-class personnel.The problem is much too complex even to be outlinedhere. All that can be done is to mention the principalquestions which make it up.(a) There is, most important of all, the question ofselecting personnel. The method of "trial and error"used in business and that of "formal competence" em-ployed in civil service alike fall short of guaranteeingrational selection. Since positions differ in functionwith difference in rank, seniority, even when accom-panied by attested competence in the position below,is no test of fitness for the higher position. If a realimprovement in the choice of personnel is to be made,standards of efficiency for particular positions mightbe formulated and their incumbents might be chosenin terms of their abilities to meet these standards.(b) There is, next, the problem of eliminating "mar-ginal managements," groups of administrators in chargeof establishments that barely remain "going concerns."The facts about the influence exerted upon the rate ofwages for a whole industry by incompetent manage-ment of poor establishments are too well known torequire recapitulation here.(c) There is, finally, the problem of enlisting the fullservices of the management in the conduct of the in-dustry. To some extent this is a question of devotionto the task to be done. It is even more a question ofengaging managers in the service of their establish-ments as instruments of production rather than as


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594 QUARTERLY JOURNAL OF ECONOMICSmake possible. After all the costs are met, there re-mains a surplus ("unearned," if you will) for someoneto claim.(c) Our industrial community has no definite policyfor the disposition of this surplus. A legal claim to it,which is merely immediate and nominal, resides in theowners of the patents. When the surplus actuallyaccumulates, it may go to the stockholders in increasedprofits, to the consumers in lower prices, to the laborersin higher wages, or it may help subsidize less economi-cal methods which the growth of competitive businessseems to make necessary. It is of note that the surplusfrom technique not yet developed but assured by acompetent research organization exists in the futureand is now unclaimed. In such gains there are as yetno "vested interests." If wage earners are willing towait, they have here a source of a constantly increas-ing wage.(d) The discovery of "natural resources" as a sourceof wage increases must not be overlooked. The "giftsof nature to production" are not fixed and definitephysical properties; their discovery and utilizationare intimately associated with the advance of tech-nique. In fact the appearance of new resources andof less wasteful methods of utilizing old ones are amongthe most important gifts of technique to production.4. A surplus may be built up by an increase in thequantity or an improvement in the character of in-dustrial equipment. The size of this surplus dependsupon two factors.(a) One is the rapidity with which the establish-ments in an industry can (with all due regard to thecosts of obsolescence and replacement) install newequipment embodying the latest technique. Improvedmachines usually cost little if any more than the less


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A THEORY OF THE RATE OF WAGESefficient ones they replace. The accruing surplus rep-resents one of the least impervious points of attackfor a raise in wages.(b) The other is the possibility of bringing the equip-ment of the poorer establishments of an industry upto the standards set by the best. It is well known thatwages in an industry are affected by "the ability topay" on the part of the poorer establishments. It isevident that poor equipment increases the cost ofproduction and diminishes the ability of the establish-ments to pay. In such cases an increase in wages is,among other things, dependent upon a competitivesystem provident enough to deny business life to thepoorer establishments. In marginal plants that sur-vive an elimination of poor and obsolete equipmentwould remove a serious check on wages.5. A surplus may have its source in an improvedorganization within the establishments making up theindustry. The possibilities here are as comprehensiveas the whole domain of the administration and manage-ment of a plant. Some of the larger of the prospectivesources of gain follow.(a) The "established order" of nearly every plantcan be greatly improved. There are possibilities of areduction in costs in a closer articulation of the partsof the business, in avoiding duplication of functions,in planning systematically for the future, in carefulpreparation for the day's work, in proper correlationwith other industries, and in an adequate system ofaccountancy and budgeting.(b) Little progress has yet been made in the estab-lishment of standards by which the efficiency of man-agements, departments, and employees can be tested.Business practice is still based upon the notion thatpecuniary reward is the exclusive bait to efficiency.

595


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596 QUARTERLY JOURNAL OF ECONOMICSYet as industry is at present organized the nexus ofindustrial efficiency with pecuniary success is far fromcomplete as repects managements, departments, andemployees. In view of this "administrative standards"might be set up for testing the efficiency of manage-ment; standards of accomplishment might be estab-lished to measure the efficiency of departments; and"production standards" might be formulated to deter-mine the efficiency of labor. The development of suchstandards will in two distinct ways tend to create anexpanding surplus. They will replace the nominalpecuniary incentives of business with real ones. Theywill reveal the current status of efficiency and byanalysis point out possible improvements.(C) The third general source of an increase in thenominal wage is an improvement in the economic arts.This can be effected either through their developmentor through their better utilization. So little is the no-tion that economic arrangements are man-made under-stood that the idea of a development of economicinstitutions by conscious and scientific methods is farfrom being universally held. For that reason the dis-cussion below of six typical problems 8 which fall intothis grouping is more protracted than otherwise itneed be. Whatever be the solutions of these problemstheir very presence indicates how important are thearrangements which make up the economic order asfactors in determining wages.

1. A considerable surplus might be created by elim-inating or reducing the violent rhythm of industrialactivity which accompanies "the business cycle." Theattendant irregularities in the operation of an industry8. A consideration of the nature of the unit for the measurement of pecuniary valuesis a seventh problem. It is discussed below in connection with the argument aboutincreasing the purchasing power of the nominal wage (VI, D).


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A TIEORY OF THE RATE OF WAGESpresent a serious defect in economic organization. Anadequate solution of this problem involves almost everyeconomic institution. It raises the whole question ofthe efficiency of industry under business guidance. Itis, therefore, too all inclusive to be discussed as a sub-head of a theory of wages. It is sufficient to indicatetwo ways in which the operation of the economic cycleholds wages down.

(a) The first and most obvious is the creation ofunemployment in periods of depression. Even thonominal wage rates are maintained, the depletion ofearnings seriously impairs the wage rate measured in aperiod long enough to be of any significance in the lifeof the laborer. Furthermore, these stoppages of in-come, by decreasing the purchasing power of a part ofthe community, indirectly lower the wages of thoseconstantly employed.9(b) The second is an increase in the cost of productionper unit of product. In periods of depression overheadcosts, which are fairly constant, are spread very thickover the small volume of production. In periods ofprosperity increased demand is accompanied by in-creases in costs, since raw materials have to be boughtat advanced prices and plants are forced beyond theirnormal capacities. A reduction in these costs throughmore regular production would create an appreciablesurplus.2. If wage earners would take thought for the mor-

9. At this point the writer cannot forbear making a single suggestion. It is that atax, as heavy as the traffic can bear, be placed upon temporal irregularities in the vol-ume of employment. It may perchance be that this will not arrest cyclical unemploy-ment, for its sources are beyond the control of the personnel of any industry. But ifthere is any truth in the theory that pecuniary rewards are among the motives to in-dustrial policy, which even the most protestant of economists does not deny, it willcause business executives to do all they can to regularize the volumes of their respectiveemployments. Since the receipts would be paid out in unemployment benefits, thiswould also tend to decrease unemployment by stabilizing purchasing power. Thus itwould provide a double incentive to the reduction of unemployment.

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598 QUARTERLY JOURNAL OF ECONOMICSrow a considerable saving might be effected in the costsof the services of property. An industry should pay nomore than necessary to secure investments. It is a mat-ter of convention that the services of executives and ofemployees are rewarded with terminable incomes andthe services of investors with indeterminate ones. Ifthe services of the investor, which are finite, were re-warded with the guarantee of an income for a definiteperiod of time, the cost of his investment would ter-minate at the end of this period. In this way the bur-den of ownership upon an industry might eventuallybe materially reduced or eliminated altogether. Twoillustrations will make this clear.

(a) It is a common practice for establishments tobuild up surpluses through "corporate savings." Theseare invested in "additions" and "betterments." Thispractice is capable of extension. In fact it might cometo be the general custom of securing funds for theexpansion of established businesses. Such surplusesrepresent earnings in excess of the payments necessaryto attract investments. It is possible to take away theconventional right of the security holder to claim suchreinvestments as property upon which he is entitledto an income. It is also possible to collect interest uponthese reinvestments from the consumers in higher prices.This makes possible a small, but gradually increasingsurplus, available for the payment of higher wages. Itwould amount to a capitalization of corporate savingsas a property right of the laborers in the industry.(b) It is possible at the end of a period of, say, fiftyyears, to free an industry from the whole of the owner-ship charge. This can be effected without the slight-est impairment of any existing property rights by thesimple device of replacing indeterminate or renewablesecurities with annuities of an equal market value


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A THEORY OF THE RATE OF WAGESterminating at the end of fifty years. In this way avery large surplus could be created.l3. A reorganization of the system of marketing theproducts of an industry offers the chance for a surplus.There is a persistent demand for a simplification of theprevailing "hierarchical system of distribution" ofgoods, with its ranks of jobbers, wholesalers, retailers,and whatnots. The obstacles in the way of marketreform are two.(a) There are in the marketing organization vestedinterests which have no thirst for extinction.

(b) There are necessary functions in the process ofmarketing goods, such as transfer, storage, delivery,and the extension of personal credit, which are essentialunder any form of market organization, and which re-quire agencies for their discharge.4. There is a demand for a larger measure of unifica-tion in an industry. Many proposals of partial unifica-tion have been made by individuals and by groups whohave zealously sought a fund available for raising wages.The following are the more important of these.(a) There is, first, the demand for "collective mar-keting." A very large part of the cost of marketing isincidental to the sale of the particular brands of com-petitive establishments rather than essential to themarketing of the product itself. In particular the de-mand for stable commodities is quite constant andselling costs are largely competitive. In this country

law has recently sanctioned the establishment by com-1. Here arises the question of the equity of the conflicting claims of the laborerswithin an industry and the consumers of its products to the income freed by the non-capitalization of "corporate savings" and by "the liquidation of ownership." It is ofno concern here only to note that the issue is between concentrating the surplus upon asubstantial increase in wages in an industry or diffusing it in slightly raising the wagesof all laborers through a decrease in prices. Of course in the improbable event of allindustries expanding through the reinvestment of non-capitalized corporate savingsand all of them liquidating ownership at the same time there would be little materialdifference between the results of these two policies upon the "wages structure."

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600 QUARTERLY JOURNAL OF ECONOMICSpeting firms of a single agency for exploiting the foreignmarket. Of late there has been much ado over pro-posals of similar organizations for domestic marketing.If this could be effected, under proper control, sub-stantial economies might be realized.2(b) There is, second, the demand for "collectiveresearch" in technique. It is proposed that the com-peting firms in an industry unite in maintaining anorganization for the development of technique, theestablishment of standards of technical performance,and the like. Technique is not developed as rapidly bycompeting firms as it could be by an institution sup-ported by all of them. The inability of the weakerfirms to maintain research organizations is a seriouscheck upon their "ability to pay" wages. This proposalseems very promising. Yet obstacles to its realizationexist in the spirit of business enterprise, the public dis-trust of monopoly, and the attitude of the courts.(c) There is, third, the proposal of a "wages pool."The object of this is to divorce the rate of wages from"the ability to pay" of the individual firm and to makeit dependent upon "the ability to pay" of the industryas a whole. Its advocates would guarantee to all la-borers in an industry a fixed rate of wages; they wouldhave this paid out of a "pool" maintained for the in-dustry as a whole; and they would require individualcorporations to contribute to the "pool" in accordancewith some predetermined principle, say, so much forevery unit of product. By thus making wages a "firstcharge" against the industry, an increased regularityand stability would be given to the wage rate.3 Yet it

2. It is evident that "collective marketing" involves some scheme for the allocationof production among the establishments in an industry. It is hard to see how the resultcould stop short of giving to an industry a larger measure of unification than bargainedfor.3. A nice problem requiring careful adjustment is presented in making the aggre-gate of all collections from corporations recurrently equal to the wages bill for the in-dustry.


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A THEORY OF THE RATE OF WAGESis hard to see how this could add more than a smallincrement to wages unless the price of the commoditywere raised or contributions were made to the "pool"out of public funds. At best it could only average outthe abilities of the several firms to pay. Offhand itappears that it could not increase the aggregate of wagesin an industry by more than the differential propertyincomes paid by the concerns making it up.

(d) There is, fourth, the proposal of "financial unifi-cation." The demand is for a united business manage-ment of an industry composed of establishments, eachof which retains its technical staff. Its advocates would,as in the case above, have wages charged against theindustry, rather than against its separate establish-ments. Many of them would have prices based uponthe average, rather than upon the marginal, cost ofproduction.4 If the financial guidance were competent,it cannot be argued against the scheme that it is a meredevice for collecting a subsidy from efficient establish-ments to maintain incompetent ones. But there aretwo serious obstacles in the way of this promising ven-ture. First, at best only the differentials of the betterover the poorer establishments could be appropriated.Second, an attempt at their appropriation through"financial unification" would have to be compulsory.If the units composing the industry were left to uniteby act of free will, there is no guarantee that the dif-ferential gains of the better establishments would bedevoted either to raising wages or to lowering prices.If "financial unification" were forced upon them, seri-ous questions of law and of the equity of established

4. The advocates of this scheme sometimes forget that if prices are based upon "theaverage cost of production " the surplus made up of the differentials obtained by basingit upon "the marginal cost" will not be available for paying higher wages. This surplusmay be distributed between the wage earners in an industry and the consumers of itsproducts. It cannot be awarded to both of them.

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602 QUARTERLY JOURNAL OF ECONOMICSincomes from property would be raised. Such ques-tions might be solved; but for the moment their veryexistence and the vested interests in their remainingunsolved are almost insuperable obstacles to an adop-tion of the scheme.5

(e) There is, fifth, the demand for "collective pro-duction." Since "collective production" is impossiblewithout "collective finance," it involves a rather com-plete unification of the industry. For that reason it isdiscussed in its proper place just below.5. More drastic still is the demand for a completeunification of the industry. The rate of wages has,among other antecedents, the prevailing organizationof an industry as an aggregation of competing units(modified by some semblance of unity for price-makingor other purposes) under business control. Under an-other form of organization wages might be higher orlower; almost certainly they would not be, collectivelyand severally, what they are now. The demand for"the organization of an industry" finds expression inan increasing number of proposals. The possibilitiesof these daring attempts to discover funds availablefor wage increases are indicated in the following dis-cussion of the three most common proposals.(a) The simplest proposal is "monopoly," the mergerof the units of an industry into a single joint-stock com-pany, with a "business organization" and under "pri-vate control." This would enable savings incidentalto collective marketing, collective research, a wagespool, financial unification, and collective production,to be made. In addition it would permit economies

5. In long-time terms the proposal is more promising. In particular it might bevery useful in industries in which production in increased quantity entails higher costs.For an increased demand and a "lower margin of cultivation," utilization, or fabrica-tion would create differentials which might be disbursed in wage increases in the indus-try. This, of course, would be equivalent to giving to its laborers increased propertyrights in an industry.


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A THEORY OF THE RATE OF WAGESfrom the careful distribution of establishments withinan industry. It is evident that such economies, ifrealized, could be made to yield a substantial surplus.Yet the proposal is not convincing. While economicopinion is coming to look less favorably upon the benefi-cence of competition, the superior efficiency of monopolyis still unproved. The distrust of the public for thistype of organization is not likely to be allayed until wedevise more effective agencies of control than we nowpossess. Finally we have not yet reached the point incosmic evolution where those who organize monopoliesfind their primary incentive in a desire to raise wages.(b) A proposal advocated more enthusiastically bythose who wish to raise wages is "nationalization."Its advocates claim not only that it will realize all theeconomies promised by monopoly but that in additionit will provide a solution for the problem of control.In spite of experience with nationalized industries invarious countries, the question still remains a specula-tive one. Of late some work has been done in breakingit up into specific questions about changes in the or-ganization of an industry. Altho this work is verypromising, research and experience have not yet re-duced it to terms calculable enough for judgment uponthe effects upon an industry of so sweeping a change inthe form of its organization. When the change is made,it will cut athwart too many habits and usages of thebusiness system to make the surplus inherent in itimmediately available.(c) Of late a demand for "worker's control" or for"joint control" has found expression in an increasingnumber of proposals. It has been suggested that themanagement of a unified industry be entrusted to thejoint control of representatives of owners and workers,of workers and consumers, or to the exclusive control

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604 QUARTERLY JOURNAL OF ECONOMICSof workers. Its advocates claim for such a scheme allthe advantages and freedom from all the disadvantagesof monopoly and of nationalization. It is superior tomonopoly in that: (1) It will save the morale of laborwhich under "capitalism" is a "wasting asset"; (2)It will utilize in management the experience and intel-lectual resources of labor which now go to waste; and(3) It will adequately safeguard the interests of thepublic. Its merits overtop nationalization in that:(1) It will avoid bureaucracy; and (2) It will throughorganization in the form of a joint-stock companyavoid a radical break with existing institutions andusages. Despite the promise of such schemes, theirproposals are too new and too little understood to befairly weighed against the present system. It is onlywhen analysis, the accumulation of fact, and detailedrestatement have reduced these blanket proposals tospecific constructive measures that a judgment uponthem will be possible . It is, however, more than possiblethat in the fullness of time (which no one is willing towait for) economic research may turn these vague pro-posals into an acceptable program for accumulatingsurpluses available for wage increases.6. This suggests a proposal of a far more scientific anda far more revolutionary kind. It is that there be estab-lished institutions for research in economic organizationand for the development of the economic arts. Scien-tific procedure in the development of the industrial artsno longer requires argument. But so prone are we toregard the arrangements which make up the economicorder as "natural," or as the deliberate selections or"survivals" of a long process of "trial and error," thatwe think little of subjecting them to scientific scrutiny.Our economic order was never deliberately contrived.It emerged as the result of the attention given by many


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A THEORY OF THIE RATE OF WAGESmen to the small matters of their own concern. Theconstant changes which are occurring in it are by-products of attention to particular interests and specificproblems. Of late the case for research organizationsto accumulate "the facts" about the industrial systemhas become more convincing. But something more ispossible. There might be research organizations withcompetent personnels who were able and willing toexamine proposals for economic change quite disin-terestedly. They might by analysis, criticism, theaccumulation of fact, and interpretation, translatevague proposals of changes in economic organizationinto constructive propositions. This they could dowithout commitments for or against the proposals con-sidered. This would make possible valid judgmentsupon such matters. It would be a significant step inthe substitution of "reform by method" for "reformby agitation." The advance in the state of the indus-trial arts is coming to rest upon scientific method. The"backwardness of the economic arts" might be over-come by a like attack.V. The mere existence of these potential surplusesdoes not automatically raise wages. That result is alsocontingent upon the ability of the wage earners in anoccupation or industry to command them in competi-tion with other groups. Of the many factors affectingthe competitive strength or weakness of the group ofwage earners in an industry, the following seem to beof the greatest importance.(A) The factor most often stressed is the relativescarcity of laborers who can do the work of the industry.A rapidly increasing native population, a large immi-gration, a reduction of tasks to routine, an easy admis-sion to an occupation, and kindred factors tend todefeat wage earners in their attempts to appropriate

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606 QUARTERLY JOURNAL OF ECONOMICSthese surpluses. Conversely a static native population,an arrested immigration, a detailed differentiation oftasks, a rigid requirement for admission to a craft, andsimilar elements tend to aid their struggle. All of thesehave received adequate attention and require no de-tailed discussion here.

(B) A second factor is the unit used by the laborersfor bargaining purposes. If the rate of wages appearsin separate contracts between a corporation and eachof its employees, the wage earners in an industry willhave less power to claim these surpluses than if theyact as a unit for bargaining purposes. If the laborers inan industry are organized and the employers are notthey will possess far more power over these surplusesthan if the employers are organized and they are not.The institution of collective bargaining has receivedscant attention in reputable economic theory. But itfinds adequate expression in the growing body of theorywhich is being built up incidental to "the labor prob-lem" and requires no detailed formulation here.(C) A third factor is the strategic importance of theindustry in which the laborers are engaged. Wageearners in industries of growing importance have a muchbetter chance to appropriate these surpluses than la-borers in industries of declining importance. In adeveloping industrial society there appear periodicallyoccasions upon which an industry of high strategicimportance can command additional revenue at theexpense of the consumers. If the laborers within theindustry have a strategic position, they can divert alarge part of this surplus into higher wages. If all in-dustries were to be organized and if laborers in the morestrategic industries were to keep their ranks intactagainst the invasion of laborers from less strategic in-dustries, the pecuniary returns due to the strategic


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A THEORY OF THE RATE OF WAGESposition of these industries in the economic systemcould be converted into differential wages for the la-borers in those industries.6

(D) A fourth factor is the theory of wages held bythose who bargain about wage rates. The importanceof this factor is in direct proportion to its general neglect.If the representatives of wage earners in an industrybelieve that the rate of wages is fixed by a "naturallaw," resting upon some such ultimate and immutableterms as "demand" and "supply," they have littleappreciation of the problem of raising wages. If theyconceive of the productivity of labor, the ability ofmanagement, the efficiency of technique, and theefficacy of business organization as established institu-tions, they can make no use of improvements in theseinstitutions in a program for raising wages. If theyassume that wages can be raised only by raising prices,they limit themselves to the use of a single device. Ifthey comprehend the many and varied sources fromwhich an increase in wages may come, and if they canmake skillful use of devices for tapping these sources,they will be equipped to formulate a comprehensiveand progressive program for raising wages. To repeat,one of the most important terms in the theory of wagesis beyond peradventure the theory of wages held bythose who formally make wage rates.

6. One of the most interesting questions presented by the possibility of the organiza-tion of all industries is the principle of wage payment. It is entirely possible that la-borers would be paid, not in accordance with ability, experience, or application, but inkeeping with the strategic positions of the industries which they served. Such a situa-tion, however, would not be new. To cite a single example, laborers of equal nativegifts and application are rewarded differently because they work under different eco-nomic systems or choose to be born in different centuries. In fact such differentials areat least pertinent factors in the explanation of all wage rates. For so long as we talkvaguely about the relationship of wages to ability, skill, and application, but have nostandards for testing these qualities (except wages, which involves reasoning in a circle,and a very short one at that) we cannot escape the fear that the current wage structureis full of such differentials. The problem of justice between laborers in different occupa-tions and industries is probably as far from solution with us as it would be under asystem in which all industries were organized.

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608 QUARTERLY JOURNAL OF ECONOMICSVI. The rate of wages in an industry may remainnominally the same and still be increased if its purchas-ing power is increased. Winning a nominal wage isonly one-half of the process of gaining a living. Tocomplete it the laborer must take his wage to marketand exchange it for goods and services. His real wageis as intimately dependent upon the terms of that ex-change as it is upon his nominal earnings. Or, more

briefly, the prices of commodities are one-half of theproblem of wage rates. Only a cursory account of thesources of an increase in real wages through lower pricesis possible here.(A) The most obvious source of such an increase inreal wages is a decrease in the prices of goods whichare means to the laborer's well-being. All of the sourcesof an increase in the nominal wage enumerated above(IV) are, with the exception of the device of taking theincrease out of the consumer (IV, A, 1), sources of lowerprices. Of particular importance are those which con-duce to an increase in the resources of production. Allof these surpluses may, instead of being used to raisewages in the industry, be devoted to lowering the priceof the commodity to the consumer.(B) The increase in real wages through lower pricesmay be accentuated by a diversion of productive re-sources from other uses to an increase in the commodi-ties which are articles of importance in the laborer'sbudget. In part this can be effected by the eliminationfrom production of waste goods, as, for example, thematerials of competitive national armament; and inpart by diverting to the production of essential com-modities resources now used for the fabrication ofluxuries. The latter can be aided by all those measureswhich tend to a more equal distribution of wealth.(C) The real value of the nominal wage may be ap-


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A THEORY OF THE RATE OF WAGESpreciably increased by an elimination from the laborer'sbudget of expenditures whose object is the avoidance ofill-being. The dubious expenditures for curative drugsand medical services and the excess in the insurancerate due to the hazards of the occupation are examplesof such expenditures. The development of sanitation,the growth of preventive medicine, and the movementfor safety, which tend to decrease such expenditures,add substantial increments to the laborer's income.(D) The real value of the nominal wage might bematerially increased if stability were given to its pur-chasing power. The wants of the laborer's householdare regular and recurrent; his income should possessthe same characteristics. At present the nominal wageis at the mercy of a vacillating system of prices and acapricious unit for the measurement of market values.A real "stabilized dollar" would be tantamount to asubstantial increase in wages.VII. The laborer's wage falls into two distinct parts.The first is the nominal wage, converted into a realwage through purchases of commodities and services.The second consists of goods and services which, underprescribed conditions, are at the laborer's disposal.There are two sources of this free income, each of whichrequires passing mention.(A) One is the establishment employing the laborer.Facilities for recreation, the benefits of a health service,and opportunities for industrial training are among themany services offered to an increasing number of la-borers by the concerns employing them. Some of these"welfare services" owe their establishment to manage-ments who wereconvinced that they would pay. Othersrest upon the ephemeral basis of attempts to avoidtaxes. In such cases the value of the service was re-garded as at least equal to the excess in cost over the

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610 QUARTERLY JOURNAL OF ECONOMICSamount that otherwise would go into taxes. For thefuture there is every prospect of an increase in the scopeand number of such services.7(B) The other is the political community of whichthe laborer is a member. The free use of parks andlibraries, free schools for his children, access to a publichealth service, and doles for unemployment are typicalexamples of economic services offered by the state tothe laborer. Through them the real wages of laborhave been materially increased in the last twenty years.These items, too, are among the most important in thelaborer's budget. Such increases eventually entail littlecost upon the community; for educational opportuni-ties, the supervision of health, and like expenditures willpay for themselves in the next generation. Immediatelythey do impose a cost and this cost is the most effectivelimitation upon their extension. Since they are paid forby taxation, which falls only in part upon laborers,they do constitute a net addition to wages. To the ex-tent that such taxation meets the canon of "ability topay," the smaller is the burden upon laborers and thegreater the addition to real wages. An increase in thepolitical power of wage earnersargues for an enlargementand extension of such community services in the future.VIII. This discussion of the sources of an incrementin wages leads inevitably to a general theory of thedetermination of a wage rate in an industry. The initialproblem of how real wages can be raised requires theelaboration of such a theory and the discussion abovesupplies all the material that is needed for it. Such atheory, quite inchoate as it is, is given a tentative state-ment in the propositions which follow.(A) The sources of an increase in a wage rate are the

7. It is frequently argued that such services do not constitute a net addition to wages,since they are paid for by subtractions from nominal wages. This argument has notbeen proved and is highly improbable.


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612 QUARTERLY JOURNAL OF ECONOMICSthe labor charge against the establishment rather thanagainst the industry as a whole, and the like.(b) The relative ability of wage earners to commandincome in competition with other groups.2. The purchasing power of the wage.3. The goods and services which fall outside thenominal wage.(C) The specific factors upon which the rate of wagesin an industry or occupation rests are customs, habits,practices, institutions, or, if you please, arrangements.Typical examples are the current values set upon naturalresources, the state of industrial technique, the practiceof absenteeism, and the institution of charging wagesup against a corporation rather than against the indus-try as a unit. Or, to put it differently, the theory herestated is institutional.(D) The wage rate and the factors upon which it restsare all variables.' It is subject to a constant process ofincrement and decrement. The increase accrues be-cause of an increase in one, a number, or all of thesefactors, or because of an improvement in the bargain-ing powers of laborers. The decrement appears becauseof a decrease in one, a number, or all of these factors,or because of a decline in the bargaining power of la-borers. The making of the wage is a process; it isconstantly being redetermined in terms of the imping-ing factors.(E) The factors upon which the rate of wages restsare all of them in their respective degrees subject to

1. The realistic terms of this formula are still so abstract that it is difficult to ap-preciate even from the above account how variable they are. It is only when one hasworked the formula through in terms of a specific industry that he realizes their vari-ability. But the doubt is eliminated when, to cite the single example of the British coalindustry, these abstractions become laborers too provoked with "private enterprise"to give their best, managers too poorly paid to be efficient if they would, inspectors fartoo few in number for the task, engines and cages of obsolete patterns, and the sprawl-ing organization of establishments within the industry.


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A THEORY OF THE RATE OF WAGEShuman control. This characteristic is too important tobe passed without a word of comment.1. There are limits to the conscious control to whicheach will respond. The indisposition of consumers topay is a limit upon wage increases through price ad-vances; the cost of replacement of equipment retardsthe rate at which technique develops; and the faith ofthe public in competition arrests economies throughthe unification of an industry. This is inevitable, sincethese factors mutually impinge upon each other in adeveloping industrial system.2. These factors differ in the nature of the groups towhose control they respond. A single corporation canincrease the efficiency of its management; the de-velopment of technique can be controlled by an or-ganized industry, but not by the average establishmentwithin it; a change in the form of the organization ofan industry involves an appeal to the public. A tradeunion may raise the nominal rate of wages in an indus-try, but it is only as a part of a larger consuming publicthat it can increase the purchasing power of the nominalwage.3. These factors differ in the immediacy of the re-turns which control makes possible. The returns froman increase in price are immediate; those from a de-veloping technique slow but cumulative; those from"the liquidation of ownership" more than a generationaway.

4. The factors subject to control are limited in num-ber by the attitudes of the groups who can controlthem. Ignorance of the economic order or a concep-tion of it as part of the world of nature makes intelligentguidance impossible. As the knowledge of economicorganization increases and as the institutions whichmake it up receive detailed attention, there will be an

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614 QUARTERLY JOURNAL OF ECONOMICSincrease in the number of factors which those who areconcerned with wage rates regard as subject to control.(F) If the factors upon which the rate of wages in anindustry rests are institutions, if they are variables, andif they are subject to control, there can be no "naturalrate of wages." All rates of wages are artificial, thoall are not authoritatively determined.(G) The theory presented here may be called "afunctional theory" of the rate of wages. The termmeans that the rate of wages in an industry or occupa-tion is a function of the pecuniary, technical, and eco-nomic factors which impinge upon it. Since thesefactors vary in quantity from industry to industry thetheory is functional rather than numerical.(H) In its most general statement this theory makesthe rate of wages a function of all of these impingingfactors. In this form it is too long and too complex tobe used. This bewildering complexity, however, is lostwhen the use to which it is to be put is noted. For anywage rate at any particular time certain of these factorswill stand out as all-important, others as of less impor-tance, and the rest as of negligible account. In thisabridged form it has the selected character of all causalexplanations of social phenomena.2(I) This theory can be put to use only when itsabstractions are converted into the less general termsdescriptive of a particular wage rate. The factorsenumerated above, and even more their constituentelements, vary from industry to industry and fromoccupation to occupation. Factors of importance inshaping one wage rate are negligible in their effectupon another. Factors common to many wage rates

2. Even such an abridgment will not satisfy those who seek economic verity, whoknow that a formula to be true must be simple, and who crave truth that can be re-duced to italicized principles. Its defense must be that it is specific and realistic enoughto be usable.


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A THEORY OF THE RATE OF WAGESdiffer widely in their influence upon these rates. It isonly by a reduction of these factors to quantitativeterms that this functional theory can be converted intoa numerical formula explaining a specific wage.IX. Thus it is that a wage rate in an industry oroccupation is determined. Thus it is that many wagerates in many industries and occupations are being re-made. Two questions remain. One is the relationshipof wage rates to each other. The other is the relation-ship of wages to other shares in "distribution."(A) The relationship of wage rates in different in-dustries and occupations provokes contradictory ex-planations. Many persons mold these wage rates intoan orderly and unified structure. To that end theyassume as a basis of "the wages structure" "a generalrate of wages." Particular rates paid in skilled occupa-tions are thereby compounded from "the general rateof wages" and an occupational or industrial differential.Others regard "the wages structure" as so sprawlingand conglomerate that explanation can go no furtherthan the particular rate of wages. A consideration ofwages structures in different countries and under dif-ferent economic systems give evidence that wage ratesmutually affect each other. A detailed study of wagestatistics in a single country makes one skeptical alikeof a basic rate and of well-ordered differentials basedupon it. The truth is that there is a tendency towardsuniformity throughout "the wages structure" and atendency towards diversity.3 The relationship of rates

3. The trouble lies in the assumption, common to both groups, that a "cause" or"tendency" works to the exclusion of its antithesis. Economic causes and tendenciesare conceived in absolute, not in relative, terms. The truth is that the economic orderis filled with antithetical "causes" and "tendencies." To cite a single example, therelationship of the rates which make up "the wages structure" cannot be explainedwithout the assumptions both of the mobility and the immobility of labor. The ques-tion of the extent to which each prevails is one for quantitative determination. Becauseof this relativity of economic "causes," "tendencies," "forces," and whatnots, economic

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618 QUARTERLY JOURNAL OF ECONOMICS(B) The question of the relationship of wages toother shares in "distribution" may be formulatedeither in specific or in general terms.1. In specific terms the question is that of the rela-tionship of a particular rate of wages to other incomesderived from an industry. Since a general elevation ofwages involves an increase in particular wage rates itis in this form that the question is most relevant to

the problem of how real wages are to be raised. In thisform it has already been fully discussed in the argu-ment above.2. In general terms the question is that of the divi-sion of the whole of the income of society between la-borers and other claimants. As thus stated we mustlearn a great deal more about how wages, salaries, andthe incomes from property in particular industries aredetermined before we can make an intelligent attackupon the principles underlying the division of the wholeeconomic income between laborers and other sharers in"distribution." For the moment this cosmic questionmust be left to the surmises and dialectic of the ro-mantic economists.X. At this point the discussion of the functionaltheory of the rate of wages properly ends. The dis-cussion above has been limited to an objective state-ment of the potential sources of an increase in a wagerate, to a theory of how a rate of wages in an industryor an occupation is determined, and to a discussion ofthe relationship of the various rates in "the wagesstructure" to each other. But, since the beginning ofthis inquiry lies in the specific problem of raising realwages, it requires for completion some application ofthe conclusions reached to the original question. Forthat reason a few cursory suggestions, all of them clearlyimplicit in the argument above, may be set down with-


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A THEORY OF THE RATE OF WAGESout violence to the positive attitude which the writerhas tried to maintain throughout.(A) This inquiry indicates that the prospects ofraising wages are very promising. The rate of wages isalways a man-made one; the factors upon which it restsare subject to control; the sources from which an in-crease can come are many and varied. Most of thesesources will yield immediately only small amounts incomparison with the total wage bill for an industry.Many of them together can be made to yield substantialadditions. More important still, most of these sourcespromise under proper guidance to yield progressiveadditions to wages. On the other hand this inquirygives little comfort to those determined to effect a sub-stantial increase in all wages immediately. It revealsthe presence of no coming economic millennium.(B) The number of questions relative to a wagesissue is very large. Investigating committees, boardsof arbitration, and other parties charged with an im-mediate determination of wage rates cannot limit theirattention to the mere facts about the cost of living,wages paid in competitive establishments, and thesuperficial showings of the balance sheet. They musttake account of a whole range of facts usually regardedas beyond the pale of wages theory and thoroly canvassthe potential sources of an increase in wages. It iseven more necessary for officers of trade unions, con-cerned as they are with the formulation of long-timewages policy, to take account of the number and varietyof the factors affecting the rate of wages.(C) The factors upon which the wage rate in an in-dustry rests are subject to very different "controls."The trade union as an institution for collective bar-gaining, the trade union as an organization for the for-mation of social policy, the professional men who are

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620 QUARTERLY JOURNAL OF ECONOMICS"experts" in the industrial and economic arts, the massof consumers, and that mythical personality called "thegeneral public," all have their respective spheres of in-fluence. Each of these has its finite control over alimited number of factors, tho the range of the consciouscontrol of each is larger than is usually supposed.Finally, some of these factors and even more theiraggregate, await the development of new instrumentsof control.(D) In its demands for higher wages "organizedlabor" cannot be indifferent to the sources from whichthe increment comes. On grounds alike of equity andof strategy the practice of claiming from the employershigher wages and allowing them to find the surpluseswhere they will is to be condemned. The alternativeof careful attention to sources involves, on the part ofthe representatives of "organized labor," a knowledgeof the industry in its many ramifications, a careful andconsciously formulated program, and scrupulous at-tention that the funds come from the predeterminedsources. This involves an increase in the number offactors in industry over which "organized labor" exer-cises some measure of control and a larger responsibilityfor the conduct of business that it has been willing toassume in the past.(E) In attempting to raise wages "organized labor"should make a sparing use of the obvious device of put-ting the burden upon the consumer. In practice thisdevice should be subject to some such restrictions asthese.1. It may properly be used to raise wages in an oc-cupation or industry to a sum adequate to a decentliving. This sanction rests upon a classification of "adecent wage" as "a necessary cost of production" andan ethical principle (arbitrarily assumed if you will)


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A THEORY OF THE RATE OF WAGESthat the consumer of the product of an industry shouldpay the costs essential to its production.2. It may properly be used, if the cost of living isadvancing, at least to the extent of returning to thenominal wage the purchasing power of which it has beenrobbed by an advance in prices.3. While there may be other cases in which its useis warranted, as, for example, to attract into an occu-pation men possessed of an adequate degree of skill,these should be very few. Every case of this type shouldbe regarded as an exception and should stand upon apositive justification.4. Its general use is likely to defeat its own object.A single union can raise wages by passing along theburden to the consumer. If all trade unions use thisdevice, the net gains will be smaller than the grossgains, since the members of various unions purchaseeach others' products. The net gains are likely to comelargely from unskilled labor, the group least able topay. If all laborers, skilled and unskilled, organizeand all play this game, the net gains will be limited tothe small returns paid in advanced prices by consumerswho are not laborers. In an industrial society im-perfectly organized this policy may be sound strate-gically (whatever be its ethical merits) for a singletrade union. It is difficult to see how it can commandthe approval of an organization purporting to represent' all wage earners."

(F) A certain source of wage increases is to be foundin an improvement of the industrial arts. The tech-nique, organization, and equipment of the great ma-jority of plants in every industry fall below properstandards. The efficiency of labor and of managementalike is subject to improvement. Through the elimina-tion of wastes surpluses of unappropriated income can

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622 QUARTERLY JOURNAL OF ECONOMICSbe built up. Other income receivers will seek to ap-propriate these surpluses. "Organized labor" can setfor itself the task of diverting to the payment of higherwages as much of this "free income" as possible. Suchgains are all net. They cannot be dissipated throughincreases in the prices of products.(G) If "organized labor" will adopt a long-time pro-gram still more substantial gains are possible. Thegreat difficulty about immediate pressure for increasesin wages is that, by threatening "established incomes,"it arouses violent opposition. There are many futureincomes which have no present owners and no currentmarket values. These mean little in the present econ-omy of the individual or the corporation. They meanmuch in the longer life of the community, since theyare but a generation or two away. "Organized labor"can afford to lay claim now to increments of incomematuring twenty, forty, or sixty years in the future.Two possibilities of this kind are incomes accruing fromadvances not yet made in the industrial arts and thefreeing of an industry from the costs of ownership ageneration hence.(H) The leaders of "organized labor" must remem-ber the large number of factors upon which the rate ofwages depends over which as a militant organizationthey can exercise no control. They need to throw theweight of the largest single group in industrial societyin favor of changes in habits and institutions which willgive to industry an improved organization, lead to thedevelopment of our "backward" economic arts, andincrease the funds out of which all incomes are paid.Many suggestions of a social policy for raising wagesare implicit in the discussion above. Here some four ofthem will be mentioned.1. There must be no indifference to the goods and


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A THEORY OF THE RATE OF WAGESservices which fall outside the nominal wage. The re-lief of unemployment, compensation for accidents, thesupervision of health, and educational opportunitiesare important items of income. Altho the laborer doesnot possess over them the direct control he has over hisnominal income, the benefits from such services arelasting, reaching quite literally into the third and fourthgeneration.

2. It must be remembered that there are only twoways to increase the material welfare of laborers. Oneis at the expense of other groups in the community;the other is through an increase in the wealth out ofwhich all incomes are paid. The first of these has verydefinite limits; the second is capable of gradual ex-pansion. The discovery, conservation, and utilizationof human resources; the improvement in the qualityof management; the development of technique with itsincreased power over "natural resources"; the expan-sion of industrial equipment; and the perfection of theinternal organization of establishments are all problemsof significance to wage workers. They should supportevery measure tending to an improvement in the stateof the industrial arts.3. The problem of finding a better unit than the cur-rent dollar for the measurement of values and of reduc-ing the extremes of the business cycle are of peculiarimportance to laborers. The vacillation in prices at-tending an unstable dollar cause a large part of theenergies of "organized labor" to be spent in securingnominal increases in wages which merely preserve theirpurchasing power. The recurrent periods of depressionand unemployment attendant upon the business cyclecause trade unions to have to make periodic fights underunfavorable conditions for the retention of wage in-creases secured upon the upward swing of the cycle.

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624 QUARTERLY JOURNAL OF ECONOMICSFreed by the solution of these two problems from per-petual concern with maintaining wages, organized laborcan with confidence address itself to the task of raisingwages. A positive program of aggressive action canreplace a negative one of passive defense.4. Of greater importance, because more generallyneglected, are the problems associated with the develop-ment of the economic arts. The stabilization of thedollar and the reduction of the rhythm of the businesscycle are problems of this kind. Others concern thediscovery and utilization of motives to industrial ac-tivity, the reduction of payment's for property servicesto a minimum, the more efficient correlation of the busi-ness units within an industry, the elimination of eco-nomic waste, and the subordination of business to theproduction of wealth. "Organized labor" very properlyfrowns upon proposals for exchanging "capitalism," ifthat is what the prevailing order is, for a hand-me-downsubstitute. It cannot afford to become committed to abelief that the prevailing order, or any of the manyarrangements which make it up, is a finality. Veryproperly it should be wary of "reform by agitation."But, on the contrary, in its own defense it must giveits whole-hearted support to research in the principlesof economic organization and to agencies for the de-velopment of the economic arts.(I) Finally, there is no panacea for raising wages.There is no formula for a wage increase which will con-vert itself automatically into a program of action."The wages structure" is to be elevated by advancesin the specific rates which make it up. The increase ineach of these rates must depend upon a procedure basedupon an understanding of the factors upon which itrests. It requires a detailed appreciation of these fac-tors in quantitative terms. That procedure must con-


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A THEORY OF THE RATE OF WAGES 625stantly be changed since these factors refuse to abide inrepose. No theory of wages is a substitute for an in-telligent attack upon a specific problem. The value ofthe theory presented above, if it has any, is in supplyingan approach which will enable such attacks to be mademore intelligently.

WALTON H. HAMILTON.AMHERST COLLEGE.

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A Theory of the Rate of Wages

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