Economics: The Basics: Labor

The interesting thing about labor is that it is the agent of change.  Land, natural resources, have the capacity to produce of their own accord, but it requires labor to transform them into products that meet human needs.  At its most basic, labor is required to harvest what Nature provides before it could be consumed; picking up a fallen apple requires labor!  Equally, capital, strictly defined, does not produce of its own accord.   A building, for example, far from reproducing itself, will deteriorate over time unless labor is brought to bear to maintain it.

But, you will say, what about money?  That reproduces itself through the miracle of compound interest.  Well, yes, that is so but money is not capital, it is a claim on wealth.  And wealth is the product of labor applied to land with capital being that part of wealth that is not immediately consumed and used to generate additional wealth.  The point, and it is an important one, is that money is not capital strictly understood.  As we have noted previously, much of the difficulty with economics is a lack of strict interpretation over the terms in use – something that the hard sciences, like physics for example, would never tolerate.

It is stating the obvious, but labor is absolutely essential: no land, no natural resources, are transformed into wealth without its involvement.  Nor will capital be created without the agency of labor.

Given labor’s vital role, it may come as a surprise that its share of national income has been falling across much of the world. The Organization for Economic Co-operation and Development (OECD) estimates that labor captured 62% of income in the 2000’s, down from 66% a decade earlier.  A falling labor share implies that productivity gains no longer translate into higher wages. Between 1935 and 1980, the U.S. became steadily more equal, productivity in the U.S. quadrupled, and wages kept pace with that.  Since the ‘80s productivity has increased but the median family real income has more or less flat-lined.  As Piketty has demonstrated in his Capital in the 21st Century, since the late ‘90s much of the wealth and much of the income has gone to the 1% or the 0.1%.  Simply stated labor’s loss has been capital’s gain.

Given labor’s primary function the question could arise as to why the returns to labor in the form of wages are not keeping pace with returns to the other two factors of production: land and capital.  This is a complex issue and globalization and the commodification of goods and services have played a part.  As technology has developed it is possible now to outsource to the low cost location or producer wherever that may be.  Of course, not all work can be outsourced; ‘non-tradable’ tasks such as a nurse or health care worker are location-specific, but nonetheless wages are still subject to pressure.

Another aspect may revolve around the difference between the self-employed and employed.  In the case of the former, for example a carpenter or an artist, the work product is clearly identifiable as his own work.  What value that work product will have will be a function of what others ascribe to it.  That value represents the man’s wages or return on effort and he has control over how he disposes of it.

Contrast this where the individual is an employee of an organization.  In this case there is a subtle and important distinction since the employee does not own what he produces, the organization owns that and has control over it.  Especially in larger organizations an employee may only produce a small part of a larger whole that may not be an end-product in its own right and thereby have realizable value.  It may simply be a component to be installed in a larger or more complex end-product where the collective value of the individual parts is realized.  The point here is that all the employee has to offer is his labor and the skills inherent in that for which he gets a wage; he is not paid for his work product.  This changes the balance of negotiating advantage when it comes to determining the price for his work product (as self-employed) to the price of his labor (as employee).  This could be a contributing factor to labor’s diminishing share of wealth.

There is also another aspect to this in that as we move from the industrial age to the information age we may need to think about how we value the contribution of labor.  In the past much of what we made were ‘rival’ or ‘excludible’ commodities.  Rival in the sense that two people could not use the same thing at the same time and Excludible in the sense that the owner could prevent others from using it.  This placed great bargaining power in the hands of the owners.  Much of what is produced now is neither Rival nor Excludible and the impact of this has to be thought through.

We will explore this further in later posts. — Chris Wood is the Head of Economic Studies for the School of Practical Philosophy, New York.



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