The Theory of Wage Rates 8

Why Different Workers Are Paid Different Wages

My previous post ended with the question: What would be the effect on worker markets if wages were not allowed to reflect relative scarcity? Suppose the state decreed that the pay rate for NFL quarterbacks and opera stars had to be the same (because they are equally skilled, dedicated, and rare). What would happen?

If the law required the pay of opera stars to be raised to the same level as NFL quarterbacks, no opera house could afford to pay them, and the stars would probably all flee to Europe or South America where no such law exists. Professional, high-quality opera in the United States would disappear.

If the law required the pay of NFL quarterbacks to be cut to equal that of opera stars, NFL quarterbacks would flee to Canada where there is a professional football league, and no such law. The quality of play in the NFL would decline along with public interest in professional football. The profits of the football teams would decline, along with the wages of players other than quarterbacks, who might also flee to Canada or give up the game. It is conceivable that professional football in the United States would disappear.

Or a slightly different scenario: Suppose it was legally mandated that CEOs could not be paid more than ten times the wage of their lowest-paid employee. (Leftists are actually advocating a version of this.) And let us suppose that the average scarcity value of CEOs was twenty times the wage of their lowest paid worker. What would happen?

The long-run result would be a severe degradation of the quality of CEOs, as the scarcity value of CEOs declined toward the legal money limit. Why? Because the top CEOs would know they were worth more than that, and most of them would refuse to be exploited in that manner. (And for once, the meaning of “exploited” in this context is exact.) The men who would take CEO jobs at the legal limit would tend to be worth that wage, which means they would be worth much less than (actually about half) the men they replaced.

Again, to the extent it was possible, top CEO candidates would flee to other countries. The effect on the economy, on economic growth, output, real wages, the standard of living, would all be catastrophic. It would be like the economy at the end of Atlas Shrugged when all the great industrialists are on strike.

In general, if the wages of workers of greater scarcity are not allowed to rise to reflect their greater scarcity, eventually those workers will disappear. If the wages of workers who are less scarce are not allowed to fall to reflect their diminished scarcity, they will be unemployed. The economy will slowly grind to a halt.

A true story: As part of the war effort in World War II, huge changes in output were required: battleships replaced railroad engines; tanks replaced automobiles; guns replaced refrigerators. To undertake these changes, more workers were required in some industries, less in others.

The United States had wage and price controls throughout World War II. When the scarcity of labor of a particular kind increased, it was illegal for employers to offer higher wages to attract the additional workers they needed. By the end of the war, some producers were crippled in their productive efforts. They were screaming for more workers, but more workers could not be found.

At this point, President Truman submitted a bill to Congress which provided for forced labor in the United States. The law said that, in a national emergency, the state could seize workers with jobs in one place and transfer them to jobs where their work was more urgently needed. The bill failed to pass Congress by a single vote.

The complete disorganization and then regimentation of the economy—that is the consequence of preventing wages from changing to reflect relative scarcity.

(I have read and heard the preceding story several times, but I have not been able to find a source. I will be grateful to anyone who can give me an authoritative reference.)

Next time, a new topic: what prices measure.