Labor Doesn’t Mean Money

All people have to work in some capacity; some of it is paid and some of it is unpaid. Getting up in the morning and making breakfast is technically work, but if you are just preparing it for yourself and your family, you are likely not getting paid for it. And yet, just 1 km down the street, there may be a busy breakfast diner where someone is getting paid to make breakfast for people. It is the same work, but one person gets paid and one doesn’t. Why is that?

Or consider this: a person works at a construction company for 10 hours a day doing hard labor and makes $800/week. A large investor in that construction company does no labor, and yet also makes $800/week on their investment. Why is only one individual doing labor while both are getting paid?

These examples could go on and on, but the point is that the connection between labor and money is not a simple one. People may make large amounts of money doing tons of labor or no labor at all. People may lose money doing labor or no labor at all. Working hard has a minimal, or at least very convoluted, impact on the amount of money an individual makes.

What Is Money-Making Labor?

For labor to be economically producing, it has to meet two criteria:

1. It must meet demand
2. It must be cost-effective

It Must Meet Demand

Identifying where demand exists but is currently unfulfilled or could be replaced by a superior supply is one of the key components of any business; whether it’s just starting out, looking to expand, or even just looking to maintain.

In the supply and demand paradigm that defines an economy, labor is on the supply side, and there are a variety of different aspects of labor that may go into a given type of supply (manufacturing, transportation, customer service, accounting, etc.). As discussed in the last article, supply must meet demand, or else it is not economically productive and thus the business cannot exist. Therefore, the elements that constitute the supply (labor being the fundamental one) must meet some sort of demand.

To “meet demand” means more than to merely supply it with something, but to do so in a satisfactory way. For example, if a chef at a breakfast diner makes a breakfast meal for a hungry patron, but the meal is not cooked properly, the patron will not eat it, and demand a refund. Thus the labor expended produced nothing economically, due to the unsatisfactory meeting of the demand of the patron.

It Must Be Cost Effective

As any business must make a profit in order to exist, its supply must cost less than the demand. In other words, they must be able to make, transport, store, and sell a product for less than what people are willing to pay for it. Supply costs for a product may include things like materials, rent for stores, marketing, and transportation- depending on the product- but they will always include labor of some kind.

Labor must always be compensated (uncompensated labor is just another word for slavery). To maximize profits, the simple way to view it is that you want to pay the least amount in labor costs possible, so as to minimize supply cost and sell at a greater profit, or for a lower price (to match demand or beat out competitors). What complicates this view is the human element, as we will now discuss.

Labor Is Done By People

While it may seem logical in economic terms to maximize profits by decreasing supply cost and therefore paying workers the least possible, this view has severe limitations and contradictions. We must recognize that people are the performers of labor, and they have choice, a desire to be fulfilled, and a sense of justice.

Workers are a commodity to a business, as they must be acquired and kept through financial incentive. Paying workers more can increase their desire to work for a certain business over another. However, workers also care about how they’re treated at work, how they enjoy their work, their work-life balance, the goals they seek to achieve in their work, and so forth. They also feel that they must be adequately compensated for the effort they put in, and the accomplishments they achieve.

The fact that workers must be attained and retained through financial incentive means that paying them the bare minimum may not always be favourable. The labor still needs to be cost-effective (supply must stay less cost than demand), but it may add motivation or a sense of fulfillment to give an employee a raise. These sorts of incentives and rewards can be instrumental in employee retention and productivity.

Skilled work typically demands a higher wage than unskilled work. This is because skills are in limited supply, and attaining and retaining a more rare employee is more difficult, and thus requires more incentive. It’s also because the skilled work is typically more economically productive for the company than unskilled work. This makes for a definite distinction in incomes between those who have been trained in a certain skill and those who have not.

It also may be said that working long hours will get more productivity out of the workers. In some cases, it may be true, but for many types of work, productivity begins to go down as employees get tired, bored, or feel their work-life balance is weighted too much in the work direction. This is why worker’s rights are not only important to workers, but can contribute to business productivity and sustainability as well.

Worker Efficiency

The other means by which labor is maximized is not through the amount of pay a worker makes, but rather how their time is spent in each hour they are earning. If an employee at a warehouse makes $10/hour and unloads 5 trucks per hour, then they are essentially costing $2/output of one truck. If that employee can work faster- whether by increased skill, new use of equipment, or less breaks, then perhaps they can unload 8 trucks in one hour. Now their cost is $1.25/output of one truck.

The ratio of labor to production is worker efficiency. Increasing worker efficiency decreases supply costs. Effective labor must be the smallest input of work to the highest output of production.

Conclusion

There is no good or service- and therefore no economic production- without labor. This, however, does not mean that labor always results in economic production. In order for labor to be economically productive, it must meet consumer demand along the supply chain and must be cost-effective; only then can the worker be paid for their labor.

A person who makes breakfast for their family is not meeting consumer demand, because their family is not expecting or willing to pay them- or if they’re making breakfast for themselves, they are both the supply and demand, and therefore are not meeting consumer demand either. A person who makes breakfast for other people at a restaurant is meeting consumer demand- who all have an expectation and willingness to pay more than the supply costs. Therefore, the employee can be paid for making breakfast for the diner patrons.

It is true that an individual may make just as much, or more, money by merely investing in a company and doing no labor at all, compared to those who do labor. This is due to the fact that any business that is able to produce cost-effective labor and consistently meet demand will always have supply costs that are less than price to consumer. These extra profits may go back into the business, enjoyed by shareholders through dividends, given as bonuses to workers, spent on new investments, or increase the business’ worth, or all of those things.

When a business is able to meet consumer demand in some form, they will always require labor. This labor must be cheap enough to be cost-effective i.e. the total supply costs must stay lower than the price to consumer. This motivates companies to pay their employees the least possible. However, employees may move to other businesses that offer more money, or who offer a better lifestyle (work-life balance, opportunity for promotion, work satisfaction, etc.). These complicating factors make labor costs more than about minimizing cost, and force us to consider the human element of labor. Enforcing basic standards are laws for worker’s rights, but businesses may often need to exceed minimum standards in order to acquire and maintain a quality workforce- especially one that requires advanced skills or knowledge.