Academic journal article The Economic and Labour Relations Review : ELRR

Moral Sentiments and the Minimum Wage

Academic journal article The Economic and Labour Relations Review : ELRR

Moral Sentiments and the Minimum Wage

Article excerpt

1. Introduction

At the root of the minimum wage debate is a question of substantive justice, a question of what type of society we want to create and the types of values that should structure that society (Levin-Waldman 2000:43).

Adam Smith was a moral philosopher whose major work, The Theory of Moral Sentiments (TMS) (1759) has just celebrated 250 years of publication. In this work, Smith lays out the role of public policy aimed at the good society, and the forces shaping that policy. Smith's other opus, The Wealth of Nations (WN) (1776) has become the cornerstone or foundation block of neo-classical economics, a form of economics which sees, and champions, self-interest as the engine behind economic development. The twin perspectives of public good and self-interest do not sit well together, and can lead to difficulties for social cohesion. Further, the twin perspectives can lead to conflicting analysis of Smith's views on areas of public policy such as the minimum wage. A 'just society' approach might suggest the efficacy of mandated minimum wages; the self-interested approach would suggest a contrary policy since the profits or rents of some are reduced in order to increase the earnings of others.

In addressing these dual perspectives the article is broken into four substantive parts. Following this introductory section, Section 2 details Smith's approach to 'high wages'. He develops a schema in which market forces can lead to the 'natural' or 'subsistence' wage. That market is one of asymmetric bargaining power in favour of masters. Smith was aware of market failures, and the impact these would have on the subsistence wage. In the context of an employer-controlled parliament, however, he did not seek legislative remedies for below subsistence wages. Section 3 develops the notion of the 'living wage, a variant of the minimum wage, and seeks to determine whether or not Smith would mandate a floor below bargaining in the current environment. It suggests that there is strong evidence that he would support minimum wage legislation. By way of contemporary experience, Section 4 suggests that the mandating of minimum wages is a necessary but insufficient condition for the achievement of living wage outcomes. The final section is by way of summary and conclusion.

2. Smith on Wages

Writers acknowledge that Smith was a strong advocate of 'high' wages. In his view wages accelerated economic growth and, in turn, were determined by that growth. In his account, the division of labour results in 'the greatest improvement in the productive powers of labour' (WN: 7). He applies this division of labour to a pin factory, claiming that a ten-person factory could produce 48,000 pins a day (or 4,800 per person) compared to no more than 20 a day if produced without 'a proper division and combination of [the] different operations' (WN: 9). Division results in increased dexterity, in the 'invention of a great number of machines', and in a saving of time 'which is commonly lost in passing from one species of work to another' (WN: 11).

Smith advocates a 'natural' (or just) rate of wages. He writes, 'There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated ... partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment' (WN: 62). As with commodities and produce, the price of labour is subject to the laws of supply and demand, rising in periods of shortage and falling in periods of plenty relative to the amount demanded (WN: 63-66).

In dealing more fully with wages Smith notes that in the 'original state of things' the whole produce of labour belongs to the labourer, and the worker does not have to share his output with either landlord or master (WN: 72). …

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