DAVID RICARDO AND THE NATURAL PRICE OF LABOR
It seems that I have independently come upon a theory of labor that David Ricardo observed nearly 200 years ago. (See the following article at a Fordham University website: David Ricardo: The Iron Law of Wages, 1817.)
David Ricardo wrote the following about the natural price of labor:
The power of the labourer to support himself, and the family which may be necessary to keep up the number of labourers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit, which that money will purchase. The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price. the natural price of labour will fall.
I'm not sure why it was later named the "Iron Law of Wages." It is probably a double entendre, referring to the fact that it's a hard and fast rule, as well as to the basic point that labor is priced like a commodity, and iron was the most important commodity in the 1800s. In contrast, I compared labor to crude oil which is a commodity that's more important today than iron.
David Ricardo's theory is more subtle than how socialists and communists later came to explain it. It also seems to accurately describe how unskilled labor is priced even today. Can anyone claim that the wages paid by Walmart are anything more than subsistence?
The majority of Americans do earn more than the subsistence wage, and this is because America is a middle class economy in which most workers have some level of skills which differentiate them from unskilled labor. I will leave it to a later blog post to explain the mechanism by which skills translate into higher than subsistence level wages.
WALMART AND THE NATURAL PRICE OF LABOR
Opponents of Walmart with an intuitive although not complete understanding of the natural price of labor have correctly identified the fact that the government subsidizes Walmart's low wages through Medicaid. Were it not for Medicaid, Walmart and other employers of unskilled labor would need to pay higher wages in order to provide basic subsistence to their employees.
Now Brandon Berg disagrees. He writes, "I don’t see any reason to suppose that cost of living is a factor in determining wages. The price of labor is determined just like any other good." But Brandon, that's exactly the point of the Iron Law of Wages. The price of unskilled labor is determined like the price of commodity goods such as iron or crude oil!
If the government gave a subsidy to farmers because it was felt that they weren't making enough money, this would have the effect of making farming a more profitable enterprise, so more farmers would enter the market and existing famers would increase output, thereby raising the supply and lowering the market price until farmers are once again earning the same low profits they were before the subsidy.
Meanwhile, a restaurant in Manhattan can charge $50 for a meal using ingredients that the farmers sold for one or two dollars. The restaurant has managed to differentiate the produce in a way which makes it many times more valuable than its original state as a fungible commodity. Yet another demonstration of how the U.S. is a marketing economy.
Read my post on the Upside Down Laffer Curve and the natural price of labor.