Wages, Unemployment and Inflation.

In a market economy, consumers have the power. They dictate what businesses produce and at what price. Businesses must meet consumer demands and sell at affordable prices to succeed. If they don’t, they fail. Consumers indirectly set wage levels by determining how much businesses can afford to pay their employees based on the prices they’re willing to pay for goods and services.

1. Wages Ultimately Paid By the Consumers
Consumers ultimately pay wages. Employers can’t pay employees more than the value their work adds to a product, as determined by consumer willingness to pay. If they do, they’ll lose money and go bankrupt. Employers act on behalf of consumers when paying wages. Since most goods are bought by people who earn wages, it’s the wage earners themselves who largely determine their own compensation levels by how they spend their money.

2. What Makes Wages Rise?
Buyers pay for the products or services received, not for the time or effort spent by the worker. The value of a product is determined by its market demand, not by the labor hours put into it. Therefore, workers are paid based on their productivity, which is largely dependent on the tools and technology they use.

In the United States, the high level of capital investment per worker enables businesses to utilize the most efficient tools and machines, leading to higher productivity and consequently higher wages. This has resulted in the high standard of living and the ‘American way of life’.

On the other hand, countries like Nigeria have lower wages due to policies that hinder the accumulation of domestic capital and the investment of foreign capital. This lack of capital prevents businesses from adopting modern equipment and technology, leading to lower productivity and lower wages.

The only way to improve the standard of living for the wage-earning masses is to increase the amount of capital invested, which will lead to higher productivity and higher wages. Other methods, such as artificial wage hikes or government subsidies, may be popular but are ultimately futile or even harmful, as they do not address the root cause of low productivity and may lead to economic instability.

3. What Causes Unemployment?
The widespread belief is that unions and government legislation are responsible for improving wage earners’ conditions, including higher wages, shorter working hours, and the elimination of child labor. This belief has made unionism popular and has driven labor legislation in recent decades. As a result, many people tolerate union violence, coercion, and intimidation, as well as the erosion of personal freedom inherent in union shops and closed shops.

However, this belief is fundamentally misguided. Wage rates are determined by the marginal productivity of labor, which is influenced by the amount of capital invested. On a free labor market, wages rise as capital investment increases, enabling full employment. When wages are artificially raised through union pressure or government decree, it leads to lasting unemployment for some workers.

The policy of allowing the free market to determine wage rates is the only effective way to achieve full employment. Government intervention and union coercion may seem appealing, but they ultimately harm the very workers they purport to help. The truth is that capital investment, not unionism or legislation, is the driving force behind improved wages and working conditions.

As long as this misconception persists, it will be challenging to shift away from harmful policies masquerading as ‘progressive.’ It is essential to recognize the economic reality and let the free market work to achieve genuine full employment and improved standards of living.

4. Credit Expansion; No Substitute for Capital:
Union leaders, politicians, and some intellectuals strongly disagree with the idea that credit expansion and inflation are not solutions to unemployment. They advocate for easy money policies, which they believe will increase capital and boost production. However, this approach only creates an illusion of increased wealth, as it doesn’t actually add to the nation’s capital goods. Instead, it leads to an artificial boom, where prices and wages rise, but the purchasing power of money drops. This means that while nominal wages may increase, real wages (what you can actually buy with your money) decrease. Inflation may temporarily cure unemployment, but it does so by reducing the real value of wages. This leads to a cycle of demanding higher wages to keep up with the cost of living, which can only be sustained by further credit expansion and inflation. This is what has happened in recent years, with governments and unions pushing for higher wages, leading to inflation, price increases, and repeated demands for higher wages. The result is protracted inflation, rather than a genuine solution to unemployment.

5. Inflation Cannot Go On Endlessly:
Eventually, authorities realize the dangers of inflation and understand that it can’t continue indefinitely. If they don’t stop the increase in money and credit, the currency system will collapse, and the purchasing power of the monetary unit will become virtually worthless. This has happened before in various countries, such as the US in 1781, France in 1796, and Germany in 1923. It’s essential for a nation to recognize that inflation is not a sustainable way of life and to return to sound monetary policies. Recently, the administration and Federal Reserve authorities have ended the policy of credit expansion. While it’s not the purpose of this article to discuss the consequences of this decision, it’s important to note that the return to monetary stability does not cause a crisis. Instead, it reveals the malinvestments and mistakes made during the illusion of prosperity created by easy credit. As people become aware of these errors, they begin to adjust their activities to the real state of production, leading to a necessary, though painful, adjustment known as depression.

6. The Policy Of The Unions:
One of the unpleasant consequences of ending inflationary policies and returning to economic reality is the impact on wage rates. During the period of inflation, unions regularly requested wage increases, and businesses eventually acquiesced. As a result, wage rates became too high for the market conditions, which would have led to significant unemployment. However, the ongoing inflation masked this issue, and the unions continued to demand and receive wage hikes. This cycle must now be confronted and corrected, leading to a painful adjustment in wage rates.

To be continued…..