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Labor and Unequal Exchange

A few days ago I attended a conference on Christianity and economics at Baylor University. I presented a paper of my own, on the necessity of the price system to environmental stewardship, but mostly I just listened.

  • Timothy D. Terrell,
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A few days ago I attended a conference on Christianity and economics at Baylor University. I presented a paper of my own, on the necessity of the price system to environmental stewardship, but mostly I just listened. The conference was good for me, in many ways. I intentionally went to sessions that I expected would include papers that would challenge my usual way of thinking about economics. There was no shortage of these.

Some of the presentations I heard were restatements of arguments for the "just price." Most related this in some way to labor markets, so the relevant version of the just price argument was the one advocating just wages or just compensation. The case for just wages has a lengthy history, but some fatal flaws. Problems with value theory are at the core.

One presenter stated, early in his presentation, that in a just exchange, one receives as much value as one gives. He seemed to believe that this was indisputable. Yet, as a little consideration shows, this implies that no exchange can be just. If one receives as much value as one gives, what would be the reason for trade? Why would someone incur even the slightest cost in searching out, negotiating, and concluding a transaction, if he receives nothing more valuable to him than what he gives in exchange?

The reason anyone engages in trade is that there is the expectation of being better off as a result. Both parties to the transaction have the same intention. And both are able to succeed in improving their situations — each receiving more value than he gives — because subjective valuations of the same objects are different from one individual to the next. If I have an apple and you have a banana, and I want a banana while you want an apple, we can set up a mutually beneficial exchange. If the banana is more valuable to me than an apple, I benefit. If the apple is more valuable to you than the banana, then you benefit as well. The same idea of mutually exchange applies to the labor market. The employer and the employee can both benefit from the exchange of dollars for labor services. Exchange is not zero-sum.

Both parties can therefore benefit in any exchange, though sometimes the expected benefits do not pan out. I might buy a car only to find out that it is a lemon, but before the exchange I expected to benefit. Without perfect foresight, this problem will exist even where there is no fraud.

The idea of subjective value indicates that only the participants in the transaction can assess their gains from the trade. No outside observer can measure the gains to the buyer or the gains to the seller. (Actually, the distinction between buyer and seller, or between employer and employee, is not as clear as it may appear on the surface — e.g., an employer is selling dollars.) Therefore, no outside observer can claim that the exchange was unjust if both parties made the exchange voluntarily and without misrepresentation of what is being sold.

I approached the presenter after the session was over and asked a few questions. Though various distractions prevented the discussion from proceeding very far, my aim was to convince him that a low wage is not a prima facie sign of injustice. Some Christians who are persuaded by just compensation arguments liken low-wage laborers to slaves. "Slaving away" for a boss is not merely a figure of speech, in their view. Biblical admonitions to free slaves (e.g. Leviticus 25:39-41) are read as arguments for minimum wages or other interventions into labor agreements.

Perhaps the wage is not high enough to allow the employee to escape from poverty, but that is not evidence of injustice. Scripture does not give the employee a right to an amount of wealth sufficient to maintain a certain standard of living, just as it does not give the entrepreneur a right to success in business. Yet voluntary labor agreements make both parties better off. If a free laborer voluntarily works for 50 cents an hour, the only reason he would do so is because he perceives the wage as better than any other known alternative. As long as the laborer is able to seek alternative forms of employment (i.e., is not a slave), competition in the labor market will tend to push wages to the point where the employee is receiving a little more than his next best option, and the employer is receiving a little more in products generated by the employee than the cost of paying the employee. Both parties benefit.

The employee could not receive more without incurring search costs that he is not willing to bear, or acquiring training or skills that would increase his value to the employer. A second employer who would make 60 cents an hour from having that worker on his payroll would have an incentive to hire that person away from the first employer, and pay somewhere between 50 and 60 cents per hour to the worker (say 55 cents). Both the employee and the employer would benefit. A third employer who expects to make $1.00 an hour from having that worker on the payroll would hire the worker away from the second employer at somewhere between 55 cents and $1.

Trying to eliminate the competitiveness of this market by claiming that the worker has no choice but to work for one employer ("monopsony," in economics lingo) is unrealistic. People move between jobs to get higher pay all the time. They also move in and out of the labor force, indicating that there is at least something productive they can do with their time without being employed. In any case, monopsony has a limited effect on wages: it can never force the laborer to work for a wage that is less than what he could make if self-employed.

The kind of value theory that is behind "just wage" theories was debunked long ago. Yet the misunderstandings persist, and destructive policies like minimum wages and mandatory benefits follow. What is worse, these ideas foster a cynicism and suspicion of business. The Bible, in contrast, lends support to freedom in labor agreements. The terms of employment are to be determined by mutual agreement between the employer and the worker, with only a few restrictions — the fourth commandment (Ex. 20:8), laws concerning bondservants (e.g., Deut. 15:12-18), and the requirement that agreed-upon wages not be delayed (Deut. 24:14). Instead of imposing human ideas of justice on each other, let us not call unjust what God has not called unjust.

  • Timothy D. Terrell

Timothy Terrell is associate professor of economics at Wofford College in Spartanburg, South Carolina. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute.

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