What Determines The Wages Of Your Labor?

Wages have always been a topic of discussion. I sometimes see people talk about how even after getting a 4 year degree, they barely make enough money to sustain themselves. On the other end, I see folks who never went to college, and are making 6 figures. So, what determines the wages of your labor? Last month, I finished reading the Wealth Of Nations, which has a wealth of information, and Adam Smith goes over 5 reasons why wages differ in different employments. In this week’s blog post, I will go over those 5 reasons. Let’s dive in.

  1. “The wages of labor vary with the ease or hardship, the cleanliness or dirtiness, the honorableness or dis-honorableness of the employment.”
    Wages vary with the agreeableness of the employment. Work that is easier and cleanlier will be paid less than for work that is dangerous and dirty. Work that is carried out in day-light, and above ground will be paid less than for work carried out at night, in the sea or underground.For instance – if there are 3 individuals, and all of them are high school graduates. First one works as a cashier at a hamburger franchise, second one works as a garbage man, and the last one works at an oil rig. Needless to say that the garbage man is going to make more than the cashier simply because picking up garbage is considered “dirty”. Furthermore, the individual work at the oil rig will be paid more than the garbage collector because working at an oil rig consists of hard manual labor in “dangerous” (accident-prone) conditions. While all 3 individuals might have the same high school diploma, their working conditions will determine the wages of their labor.
  2. “The wages of labor vary with the easiness and cheapness, or the difficulty and expense of learning the business.”
    Wages vary with the cost of learning the business. The difference between the wages of skilled labor and those of common labor are found under this principle. Time spent in learning the craft, cost of education, apprenticeship, etc will dictate the wages of one’s labor.For instance – assume there are 2 individuals: one is an engineer, and the other one is a doctor. The engineer has a four-year undergraduate college degree. On the other hand, the doctor completed a four-year undergraduate program, along with four years in medical school and three years in a residency program to learn the specialty he chose to pursue. Undoubtedly, the doctor will be paid more than the engineer. The doctor has to be compensated for his educational expenses, and for his time spent in specializing and acquiring the skill/knowledge.
  3. “The wages of labor in different occupations vary with the constancy and inconstancy of employment.”
    Wages vary with constancy of employment. This means that an individual working in a cyclical business will be paid more than one who is working in a stable business.For instance – assume you have 2 individuals. One works for the local electrical utility company, and the other one works for an oil and gas company. Despite any downturns in the economy, the electric utility company will remain in business and is thus considered stable. The oil and gas company is cyclical i.e. layoffs are bound to happen during a market downturn. Therefore, the person working for the oil and gas company will be paid more simply because of the likelihood of being let go when the oil industry has a downturn. The higher wages should be able to help the individual survive through his unemployment. In short, the inconstancy of employment is the reason for higher wages.
  4. “The wages of labor vary according to the small or great trust which must be reposed in the workmen.”
    Wages vary with the trust to be reposed. Adam Smith says, “We trust our health to the physicians; our fortune and sometime our life and reputation to the lawyer and attorney. Such confidence can not be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in society which so important a trust requires. The long time and great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labor.” So, your wages will be higher is your work requires greater responsibility and public trust.
  5. “The wages of labor in different employments vary according to the probability or improbability of success in them.”
    Wages vary with the probability of success. Adam Smith says, “The probability that any person shall ever be qualified for the employment to which he is educated, is very different in different occupations… Put your son apprentice to a shoemaker, there is little doubt of his learning to make a pair of shoes: But send him to study the law, it is at least 20 to 1 if ever he makes such proficiency as will enable him to live by the business.“For instance – if you have 2 individuals; both graduated from a 4 year college. One got his degree in engineering, whereas the other one got his degree in liberal arts. Despite the fact that both of them went to college, the engineer will make more than the liberal arts graduate. Adam Smith summed up this point every well in this one sentence – “In a profession where twenty fail for one that succeeds, that one ought to gain all that should’ve been gained by the unsuccessful twenty.” We know that a lot of individuals in undergrad college start off as “pre-med”, however how many actually become doctors? Those undergraduate “pre-meds” who eventually become doctors ought to gain all the wages that could’ve been gained by those dropouts.

In short, the 5 circumstances that decide a person’s wages are: first, agreeableness or disagreeableness of the employment; second, the easiness and cheapness, or or the difficulty and expense of learning the craft; third, the constancy or inconstancy of employment; fourth, the small or great trust which must be bestowed in those who exercise them;  and fifth, the probability of success in them. So, next time you look at a job description that asks for a college degree, yet is barely paying minimum wage, understand how the wages of that labor are determined. Is the pay less because the degree/qualification is “easy” to obtain? Or is it because the society does not have to rely on that occupation (trust)? Or is it because the job has amazing job security i.e. constancy of employment? Or is it because there is no skill involved in that job, and the worker can be easily replaced?

Wages-1

Hope you learned a little and found this blog post helpful. We talked the 5 things that determine an individual’s wages. As always, you can sign up for our free mailing list here.  You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!


Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.


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