Just Wage

A Market View of Just Wages

For those who advocate a market understanding of wages, the buying and selling of labor is much the same as buying and selling any other good or service, with its price being determined by the interaction of supply and demand. In the event that quantity supply and quantity demand are not in equilibrium, then the price of labor (the real wage) will adjust upward (to alleviate a shortage of labor) or downward (to alleviate a surplus) to reestablish the equilibrium market clearing price. This understanding of wages has two principal values that inform its notion of whether a wage is just or not: freedom—the ability to freely exchange so as to protect one's autonomy and efficiency—the ability of the market to reward those who contribute to production.

In terms of freedom, this market function provides the ability of individuals to freely contract with others in pursuit of their own self-interests and utility preferences. Freedom of exchange through the price mechanism will allow a wage to adjust according to both parties'perception that what they receive in value is at least as much as what they surrender. In terms of efficiency, the market allocates the amount of a wage predicated upon talent, effort, and contribution of what it produced. Those with more education, greater productive skills, more ingenuity, harder work ethic, etc., directed toward providing goods and services that people want, will be rewarded according to their contribution. John Bates Clark, the originator of the marginal productivity theory of income distribution, argued that the distribution of income is regulated by a natural law, and when this law operates without friction, people are provided the amount of wealth they have created. While this process may create initial inequality, in the long run its efficiencies will eventually raise all boats, since it creates proper incentives for people to acquire education and skills as well as to work harder and smarter.

Interruptions or “friction” in this market process, through the state, unions, or other nonmarket entities, will weaken the role of price signals and disincentivize people from higher education, skill development, and risk taking, which will lower the efficiency of the market, producing less wealth and consequently resulting in greater injustice. It will also lessen the freedom of employers and employees by preventing them from acting according to their own preferences, unnecessarily limiting their freedom and consequently curtailing their autonomy, all of which reduces the possibility of justice.

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