Markets and Wages (7)

Here are some more problems with market wages that mean a righteous wage is still relevant in the modern world. Wages and salaries are often disconnected from supply and demand.

• In the labour market, adjustments takes place through a change in quantities rather than a change in price, as market theory suggests. Employers do not compete on price, because the long-term risks of that strategy outweigh the short-term benefits. When a profession is scarce, it is much safer to just pay what others are paying and not rock the boat. A few high performers will be paid extra, because they are critical to the business, but most staff others will still just get the going rate, or small increases.

• Neoclassical economics claims to have proved that in a market economy, every employee will be paid what they are worth. All differences in wages and salaries reflect differences in productivity. The problem with their proof is that their economic model depends on a serious of unrealistic assumptions that have no connection to the real world. That has not stopped employers from hiding behind the idea.

• The neoclassical market model assumes that every employer knows the marginal productivity of every employee and pays them accordingly. According to the model, an employer should keep employing additional employees until the marginal wage of the last employee equals the value of their marginal product. This is fine in theory, but the reality is that employers have no way of measuring what an individual employee has produced, so they no way for assessing what an extra employee is worth. A mix of capital and people contribute to every product, so the contribution of one person cannot be isolated. Employers cannot measure the contribution of a single employee or group of employees, so they most just fall back on paying what other businesses are paying.

• An employer has no way to compare the productivity of one class of employees with another. There is no economic model or accounting model that can show that the productive value of an accountant is five times greater than the productive value of a good receptionist. Decisions about their relative value depend on the subjective judgment of the employer, and they can easily be wrong.

These inadequacies with the standard economic model do not make much difference in most situations. Provided the employer has acted in good faith, and the employee has freely accepted the wage or salary offered, the situation is legitimate. However, the situation is different where the wage being offered is not enough for the employee to live on. This is where the righteous wage kicks in.