Monday, May 27, 2013

Wages, Capitalism and Morality

A friend of mine recently complained that he could not find workers in Maritimes. He was an employer and he was complaining about everyone else complaining about unemployment. There is no shortage of jobs, he told me, people just don't want to work. He's wrong, of course. There is unemployment -- we can empirically confirm that. The question is why. His argument was that Maritimers were lazy. The truth is actually something else but his question is important because it points to a failure with the way in which wages and work are understood. I thought I'd write a quick blog to explain this and, hopefully, introduce a question or two that might be worth thinking about.

How much should your employer pay you? How much should you pay your employees? Tricky questions. Most of us, I assume, believe we are worth a good rate of pay and most of us who pay people like to believe we pay a good rate of pay. We all like to believe that we treat each other honestly and compensate fairly. This is where the problem begins: compensation, in terms of how much someone is paid, is rarely about fairness and honesty.  Instead, in Canada, it is about the market and the market does not work to ensure fairness or honesty. It operates by other principles. You might like these principles or you might not. That is up to you to decide. My job is just to explain them.

Let's look at the theory first. Canada has a capitalist economy, so let's begin by looking at how wages are determined in a capitalist system.

In a capitalist system: the question -- how much should someone be paid -- is difficult to answer because the market does not specify a single rate of pay. Instead, it is determined by a floating scale that is called supply and demand. In short, wages are a negotiation. If an employer wants workers, he or she offers a certain amount of pay. Those who are willing to work for that rate of pay will show up. Those who are not willing to work for this rate of pay will not. (They could also show up and ask for more money, which is where the negotiation begins.) Now, here is the key thing: neither the employer nor the worker is doing anything wrong. Suppose an employer offers a certain rate of pay. Let's say $10.00 per hour. If someone does not show up to work, what they are doing is deciding that that rate of pay is not enough for them. Exactly why it is not enough for them is none of our business. Provided that they are legally competent adults, they make their own choices for their own reasons. As Joseph Heath has pointed out, this is their right and none of our right to interfere. We must assume that legally competent adults make the choice that is right for them (and, btw, this is how we want to be treated.)

Likewise, the employer's decision is offer a certain rate of pay is neither morally right nor morally wrong. It is a market transaction. We might find the rate of pay low, but that would be for us and so we would decide not to work. Neither the boss offering a certain rate of pay, nor the worker deciding -- in this example -- that it is not high enough and so they don't go ask for the job are being good or bad. They are simply making their own choices for their own reasons in a market transaction. If the boss does not get enough workers, what should she or he do? According to capitalism, the failure to attract workers is a market problem that can be solved through the market. If you offer a rate of pay, for example, of $10/hr and don't get enough workers, the market tells you that you have to increase the rate of pay to attract more workers.  This is how a capitalist economy is supposed to operate.

Now, let's look at how my friend approached this matter. When he said that Maritimers were lazy, what he actually was saying was that he could not attract enough workers at the rate of pay he was offering and was not willing to increase this rate of pay. In other words, he has no idea why he did not get enough workers. Laziness might be reason (and I'll turn to that shortly), but it might not be. He might have had a business that was open at certain hours and people could not make it to work at those hours because of childcare responsibilities. Or, they might simply have had other things to do. According to capitalism, the reason why they did not come to work -- even if it is laziness -- is not an issue. Imagine that it is laziness. According to capitalism, laziness has a market solution: you offer more money and people who are lazy will say "OK, I was not willing to get off my butt for $10/hr, but I am for (say) $15/hr." Said differently, the way one deals with a shortage of workers is to offer more money. This will increase supply.

The problem my friend had was that he was not a very good capitalist. He was willing to only pay $10/hr (or, whatever it was, frankly, I don't actually know). He assumed that since he was willing to work for $10/hr, everyone should be and those who are not … are lazy. Leaving aside the questionable conclusion, he was not doing what a good capitalist should do: respond to the market.

Now, I recognize that I'm describing a theory and that there are a lot of complications but let's conclude on one point and then quickly move to a question. The point is this: you get what you pay for. Why do we find a bunch of teenagers working in McDonald's? Largely because that is who will work for the wages McDonald's (or, some other fast food place) offers. And, teenagers can do this job -- or, most of it  -- and so there is no need to be too concerned about employing a lot of teenagers. But, teenagers will be teenagers. I often hear people complaining about teenagers lack of responsibilities and whatnot. Of course a teenager is less responsible than, say, a middle aged adult. But, at $10/hr that is what you get and a good capitalist knows this. A employer at McDonald's could get me, for example, to work for them and there is no doubt that I'd be a lot more responsible than most of the teenagers in their workforce. But, they would also have to pay me a lot more than $10/hr. In fact, it is likely (because I have another job) that the rate of pay they'd need for me would be prohibitive for them. I'm not bragging. I'm just describing a market "fact."

The point is this: before you complain about an irresponsible teenager at a fast food restaurant, think about capitalism and wages. We all know that teenagers are going to periodically be irresponsible. And, anyone who doesn't, doesn't know teenagers. They are going to make mistakes; forget about work; give people the wrong orders; cook the wrong food. Most of this could be avoided by hiring a different workforce but that would cost more money. So, the people who run fast food restaurants make peace with themselves: to maintain a certain wage rate, they accept the fact that there will be problems with that workforce. If they did not accept this, they would -- if they were good capitalists -- offer more money and get a different workforce. And, again, no one is doing anything wrong or morally reprehensible. This is simply how the market works. You get what you pay for.

Here is the question: if this is the theory of capitalism … why do people (including capitalists) think differently? Why do we say that people are lazy as if there were a moral problem and not a market problem? Or, conversely, why do we call a boss cheap if they don't give us a raise? They might be, but that is not the point, at least under a system of capitalism. I'd suggest that one reason we do this - call people lazy or cheap -- is because most of us don't really think about wages as a market transaction. We think of it in moral terms. Consider the athlete who is paid millions of dollars per year. We often hear people say "no one is worth X amount." But, the fact is that they are. Let me explain: I am not making a moral judgment. The people who run the Toronto Maple Leafs pay players millions of dollars a year because they believe those players will make more money for them.  Evan Longoria received a lot of praise for taking a "team friendly" contract that paid him less than people estimate he would have gotten on the open market. Is he a nice guy? Let's assume that, but his rate of pay has nothing to do with him being nice. He made a decision: living in Tampa and staying with the Rays was more important to him than making even more money. So … why do we insist on thinking of wages in moral terms? Is it because ... capitalism might not be the be all and end of human experience?

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