This is Richard Wolff from Democracy at Work, responding to another Ask Prof. Wolff question
from our Patreon community, and this one comes from Dan Teston in Texas. Dan asks me about how
to respond to an argument that runs as follows: If workers succeed in raising wages, all the employer
will do is pass on the higher wages by jacking up the price of whatever the worker helps to produce.
And then, in the end, won't the rising prices undercut the whole point and purpose of getting
a wage increase? I want to divide this important question into two parts. First, let me talk about
what the logic is, what the economics are, around the wage increase and what happens to price.
And then we'll turn to the second part, about how price increases undercut wage increases.
So, here we go. The first issue is easy to respond to. It is wrong economics. It's poor analysis
to imagine that a wage increase automatically produces a price increase to compensate the
employer for pay. I could show you thousands of cases, real empirical cases, where wages went up,
and no increase in price happened. So, we know, in fact, there's no necessity for the wage increase
to lead to a price increase. But we can also handle it theoretically by showing you, which I'm
about to do, why the price of something is shaped by many, many factors—the wage paid to the worker
is only one of them. So if someone tells you there's a necessary relationship between the wage,
on the one hand, and the price, on the other, they're pulling your leg. And they're usually
doing it because it's convenient for employers, who have to go to the public, when they raise
prices, to blame it on the workers. To blame it on wage increases for the workers. That way the
employer, who's raising prices to make more money, can appear not to be the one who's at fault here.
“He's merely reacting to the wage increase imposed upon him!” etc. So, here we go. If a wage goes up,
the employer can do the following. Number one: he can search harder than he did before to save money
on one of the other inputs to production besides workers. The cost of the energy you're using.
The cost of the inputs you're using. The cost of the tools, the equipment, the machines.
If those go down, either because you work at it or because you're just fortunate, at the same time
that the wages go up, the one cancels the other, and there is no need for you to change the price.
Let me give you another example: if workers productivity goes up—that is, if workers become
more productive. In an hour of effort, they produce 10 units of output, where, before,
they only produce, let's say, eight. That's called an increase in productivity. You're getting more
out of the worker. You're having more to sell from that worker's hour of labor.
So, even if you pay him more, you're going to be getting a higher revenue from his extra
productivity. You don't have to raise the prices on top of that, do you? Of course, you can try to.
Employers try to raise their prices all the time, but there's no necessity that they do so,
and their claim to the contrary is dishonest. And I'm being as polite as I know how to be.
Then, there's another way to get at it. The price is what the market will bear—what an employer can
charge for the goods or the services workers help produce depends on the demand,
depends on people's tastes, depends on how much income they have to spend. All of those things
will shape and influence what price he can charge. To claim that all of those
other factors somehow don't count, and that what's driving the price is this one thing,
you should be deeply suspicious. And the only way to confirm that a rising price is due to the wages
as opposed to all of these other influences, you would have to look at the books of the company,
which the company and that employer will almost never let you see. So they hold back
the only real information that could confirm the claim they make. Do you smell a rat here?
Good! You should. Last point, that point in the second part of Dan Teston's questions:
does a rising price undo the wage increase? You bet it does! In economics we have a term
called “the real wage,” and that's what we call when you adjust the wage you get, the money you
get per hour, for the prices you have to pay. And the reason is simple. If you get ten percent more
wage, but everything you buy costs ten percent more, your extra wage in money doesn't translate
into an extra wage in terms of the real bundle of goods and services you can afford to buy with
that wage. The real wage, therefore, measures what has happened to prices. And one of the ways that
working people have been screwed, in a capitalist system, is that capitalists have every incentive
to raise the prices, because it will improve their profits, in most cases, and so, of course they do.
And they don't care that when they do that, the value of your money wage goes
down. That has often led working people and trade unions to think that it might be wise,
especially when you're going for a wage increase, to begin to exercise controls—government
and other kinds of controls—on prices. Otherwise, you permit the employer to go through the ritual
of giving you a higher wage only to take it back by jacking up the prices, which gives you
a real wage increase that is next to nothing. I hope this has made these questions clearer.
Thank you to our Patreon community, as always. And this is Richard Wolff for Democracy at Work.