The "Iron Law of Wages" and Walmart

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

Brandon Berg from the blog Catallarchy brought to my attention his recent post on Walmart and the Iron Law of Benefits.

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.

UPDATE

Read my post on the Upside Down Laffer Curve and the natural price of labor.

Comments

[nobody]

What is the restaurant selling for $50?

1) $2 worth of food
2) convinience of eating in a particular location
3) higher status than eating at Mcdonalds

Without giving an example of available alternative under the circumstances, is not clear this example is supposed to prove. Chances are, the differentiation is not about food.

What happens when a street vendor park his cart next door offers the same food for $5? What happens when every restaurant sells raises their price to $50? This is why various poster here had some serious questions about what exactly marketing ecomony is. Advertising is of limited value to the rational consumers who have perfect information.

[michael vassar]

"Can anyone claim that the wages paid by Walmart are anything more than subsistence?"

I definitely do claim that. As I said before.
Rice and beans <$1/day/adult and one child.
Pre-fab housing 2 workers/ 3 bedroom house with two kids to replace them. $10,000/minimal lot in midwest 45 minutes from Wall Mart + 40,000/house/2 workers x6% interest on mortgage = $4/day/person and 1 child
Bus fare for mass bussing to Wall Mart from hypothetical Wall Mart development $3/day/worker
Basic replacement of capital, taxes, etc $12/day/worker
Total = $7,000/year = 1/2 Wall Mart wages.
Total

[josh]

half sigma,

The value of wages has actually increased substantially with Walmart, you know, even if the actual monetary value has fallen.

Today with your minimal wage at walmart you have access to thousands upon thousands of goods, enabling you to choose exactly your best basket.
Without walmart, this was not so; namely, you only had a few types of goods at local stores etc.

It follows that the "value" of a worker's wage at Walmart is actually prob higher than a higher monetary wage without walmart.

Get it?

[Brandon Berg]

I'm not sure I see what your argument is. Is it that Medicaid substantially increases the supply of labor by keeping alive people who would die without it?

And no, I don't think that Wal-Mart's wages are subsistence wages. Remember that in Ricardo's time people worked many more hours for a much lower standard of living. If you're trying to say that unskilled workers always have wages which support the lowest standard of living regarded as acceptable in their time and place, that's true, but it borders on tautological.

[Russ]

I think your observations about the marketing economy are spot on. The reason there's some confusion (like the first poster) is that the marketing economy is not intuitively subject to analysis. That's precisely why it's so successful. Ideas are harder to copy in the marketing economy because you can't put your finger on exactly what makes them better than the alternative.

[SFG]

"The reason there's some confusion (like the first poster) is that the marketing economy is not intuitively subject to analysis. That's precisely why it's so successful. Ideas are harder to copy in the marketing economy because you can't put your finger on exactly what makes them better than the alternative."

I wonder. I don't see why these things can't be studied like anything else. You might not be able to treat them like physics with differential equations, but I doubt the whole human status apparatus is so complex it can't be studied.

[Half Sigma]

Brandon: "If you're trying to say that unskilled workers always have wages which support the lowest standard of living regarded as acceptable in their time and place, that's true"

That's actually exactly what Ricardo meant if you read carefully what he wrote. He explained that conveniences become so customary that they are like a necessity. The subsistence wage also requires being able to support a family, so the subistence wage is going to be a higher than needed to support two people both working and sharing a place to live. He also explained that in a growing economy, the wages will also tend to rise a bit above the subsistence level.

michael vassar: these super-cheap places to live don't exist in the northeast. Zoning. If the government allowed for such super-cheap places to live, then according to the Natural Price of Labor Theory, wages would fall.

[cpurick]

"Dogs are so cute when they try to comprehend quantum mechanics." -- Gary Larson

[Russ]

I think the marketing economy is so difficult to understand and copy because it's almost impossible to be objective about it. How do you say, "Why are these Target commercials so appealing in a way that totally differentiates the store from Wal-Mart" when you yourself are experiencing the same effects in a unique and personal way.

I think this may be part of the reason why Jews have been so successful in the retail industry. They have a more objective view of the seemingly intangible tastes of the goyim.

[cpurick]

Ricardo does not apply in an industrialized economy where virtually all workers acquire specialized skills, and where the poverty (subsistence) level extends well above the lowest unskilled wages.

Such an economy requires "entry level" employment so that workers can develop the skills and experience necessary to reach the subsistence level.

If Ricardo applied his theory to Wal-Mart like he applied it to "the poor laws" of his time, then he would argue for the abolition of Medicaid and the minimum wage.

Of course, if Wal-Mart paid its employees the equivalent of whatever it might be externalizing through Medicaid, who honestly thinks those employees would use that money to purchase health insurance???

[Peter]

Is there any statistical evidence to support the claim that the government "subsidizes" Wal-Mart's low wages via Medicaid? It's certainly my impression, from going into any Wal-Mart, that a high proportion of the workers likely have other sources of health insurance: young people on their parents' policies, married women on their husbands' policies, seniors on Medicare. It would be most interesting to see some actual numbers.

[dearieme]

Doesn't your argument depend on their being an almost endless supply of unskilled labour available? Ah, Mexico?

[Frank]

HS thinks if a woman goes on a first date wearing makeup and a push-up bra, this is another example of us being a marketing economy.

[bbartlog]

Can anyone claim that the wages paid by Walmart are anything more than subsistence?

michael vassar already took you to task for this, but I'll second him. If by 'subsist' you mean: have cable TV, a used car, and occasional outings to a local amusement park for your family, then you might have an argument. But this is so far removed from Ricardo's notion of subsistence that it's basically bait and switch. I recall working for $8/hour in the early 1990s and saving $5000 of my wages (after taxes) in one year (bicycle to work, eat tuna and rice, share housing costs with three friends). Now, I was single, and those with family may have more difficult choices; for most people it's easier to choose a spartan lifestyle for themselves than to choose it for their children. Nonetheless, the essentials of life simply don't cost that much money (except, in some places, housing, but you can thank zoning for most of that).

[Peter]

Nonetheless, the essentials of life simply don't cost that much money (except, in some places, housing, but you can thank zoning for most of that).

Transportation to work (or anywhere else) is just about impossible most places without a car. Between insurance, gasoline and repairs, owning even an older car is most definitely a non-trivial expense.

[Half Sigma]

Rent is very expensive. Cars are very expensive. Healthcare is very expensive--sometimes a person can get buy for several successive years without needing any, but the class of unskilled workers as a whole needs healthcare. Pregnancy requires healthcare and pregnancy is a necessary part of maintaining the existence of the unskilled worker class. Education is very expensive but it's provided for free by the state (a subsidy to employers).

In a place where people only needed clothes and food, you can live for only a few dollars a day, but that's not the United States.

[cpurick]

"sometimes a person can get buy for several successive years without needing any, but the class of unskilled workers as a whole needs healthcare"

Actually, few people are "unskilled" on a long-term basis, and most of that group enjoy the health benefits of youth.

Some people foolishly count the unskilled population year after year, and feel pity for all the people trapped in poverty. In reality, "unskilled" is simply a stage most people go through; not a class in which anyone is likely to become trapped. At any given time, the individuals who might be numbered as unskilled tend to be different people than the ones who were unskilled a few years earlier, or the ones who will be considered unskilled a few years hence.

What the unskilled "need" is to focus on developing their skills and experience so they can become self-sufficient as quickly as possible.

[bbartlog]

Pregnancy requires healthcare

Some prenatal care and diagnosis likely offers benefits, but on the whole medical intervention (and especially hospitals) are vastly overrated when it comes to childbirth. See here for some references. In any case the notion that pregnancy *requires* healthcare is bogus; my wife delivered our second child entirely at home (we did take the baby to a pediatrician a couple days afterwards, but that was just because it was the easiest way to get a birth certificate).
Even in cases where healthcare is beneficial, I don't agree with the idea that it is an entitlement or that no one can subsist without it.
As for rent and cars being expensive: for rent it depends on where you live. You live in NYC, I live in Pittsburgh; obviously we have rather different experiences regarding the affordability of housing. Cars certainly can be expensive (more due to gas an insurance than the actual cost of the used vehicle), but obviously they are not everywhere essential - many jobs can be reached via public transit, even in the US with its relatively mediocre system.

[nelziq]

I guess Marginalism never made it to this corner of the web.

[Peter]

Cars certainly can be expensive (more due to gas an insurance than the actual cost of the used vehicle), but obviously they are not everywhere essential - many jobs can be reached via public transit, even in the US with its relatively mediocre system.

True ... if you live and work within walking distance of bus or other transit lines, and if any necessary connections between lines can in fact be made, and if the ride isn't impossibly long (a 10-mile bus ride may easy take over an hour with all the stops), and if your work schedule fits in with the transit service's operating hours (many have no evening or weekend service). And the biggest "if" of all, if service is even available where you live and/or work.

[bbartlog]

Marginalism is more obviously relevant when discussing scarce goods, goods that can be stored, and items where different people have very different ideas about the value. It's less clear how relevant it is here; as it happens I agree that it describes things better than the iron law (under today's conditions), but I think you'll need more than a snarky comment and a wiki link to make your point.

[Jody]

HS:

While I agree with you that the subsistence level forms a natural floor for wages, I disagree with your current assessment of the low skill economy (so first 2.5 graphs are ok and then it goes off the rails).

As vassar points out above, you don't need $7/hr to live. So Walmart wages are above subsistence levels. (Same thing at McDonald's too)

The reason why low-skilled wages are above subsistence is that demand exceeds labor supply. Seriously, how often do you see a help wanted sign in a fast-food joint? I see them all the time.

However, if demand were to fall below labor supply, then the iron law of wages could come into effect with subsistence levels forming a floor. (If you're going to die anyway, why work?)

This, however, feeds into what I believe is your real point (which I believe you are distracting from with your misassessments of the economy):

a) By continually increasing the pool of unskilled labor, we will eventually see the iron law of wages play out - something we all agree is a bad thing.

b) If we decrease the levels of unskilled immigration, we can keep labor supply from outstripping demand thereby avoiding the iron law of wages problem.

[Jody]

Peter's big if: People don't move? Tell that to the Mexicans.

[spungen]

"In any case the notion that pregnancy *requires* healthcare is bogus; my wife delivered our second child entirely at home"

Bbart, I'll bet you had some assistance from a midwife or doula. Also, you probably did a lot of preparation and study, which requires education and sophistication. You had a backup plan to contact a doctor should one of the many possible complications occur. And, your wife had prenatal care and testing to make sure she and the fetus were healthy and that there were no risk factors. She took those prenatal vitamins and ate lots of fresh produce, no?

Lower-class women are more likely to develop conditions such as gestational diabetes and preeclampsia, because they are less healthy in general (usually heavier, worse diets, worse habits, plus jobs that may require standing on feet all day or enviro hazards). The poor health of the mother often means poor health for the baby later. The type of people who work at Wal-mart actually need more medical care than do wealthier people.

[bbartlog]

Hmm, well:
midwife or doula: no (my wife has since started studying to become a midwife, but that's another story).
Backup plan: yes.
Prenatal testing: no. Only makes sense if either A) there is a non-negligible chance you're going to find some condition that would mean choosing abortion or B) testing might show risk factors that would change your hospital/homebirth choice or other preparations. Note that many tests, such as amniocentesis, carry risks of miscarriage, while others, such as ultrasound, have never been proven safe.
Preparation and study: well, yes. And I agree that 'education and sophistication' help a lot here, and that without an internet connection you'd need to haunt the public library to do the same research. However, the preparation and study we did more or less convinced us of the wisdom of doing very little; it's not clear how to count the cost of such research, since such a choice does not need to cost anything at all.
Diet: protein is underrated compared to vitamins, but yes.

I agree that the dietary choices of poor people are often not good. But is this because they can't afford decent food, because they don't know enough to do so, or simply because they lack the discipline to make the right choices? I'd lean towards 2 and 3...

[The Superfluous Man]

Linda Gottfredson has done research on the connection between socioeconomic disparities in health and IQ. One such finding was that after warnings are published, like the danger of smoking, such disparities increased.

[James Bowery]

The power of the labourer to support himself, and the family which may be necessary to keep up the number of labourers

If the demographic collapse of the native US population that occurred over the last generation tells us anything it is what I keep telling people: they need to stop talking about "cost of living" and start talking about "cost of reproduction".

The cost of reproduction is more than just how much money it costs to pop out another kid. For instance, it might be that the cost of reproduction could be minimized by binding the feet and cutting the clitorises of all the women. What no one seems willing to discuss is the fact that the "young North Americans" -- the identity donned by Mexican laborers -- wouldn't be so "young" if it weren't for the fact that the young Mexican women are at a severe disadvantage when it comes to their choices.