Subscribe to BrookesNews’ Bulletin
Businesses do not pay wages –– consumers do
Gerard Jackson
The antics of our union leaders and their political and academic supporters have once again brought into the play the economic fallacy that businesses pay wages and that they should be made to pay more. The statement that businesses can not pay wages is either ignored or ridiculed despite being perfectly true.
It is not the businessmen who pay wages it is consumers. A business is basically an intermediary between factors of production and consumers. Ultimately it is the consumers who pay for the factors of production and not the businessman. Furthermore, each factor, especially the services of labour, tends to be paid to the full value of its contribution to the production of the product or service.
If, as happens all too often, the government decides to raise the cost of labour, e.g., it imposes a superannuation levy or just decides to raise wages to buy union support, it will always try to kid people into thinking that business will pay. (Unfortunately a significant number of politicians subscribe to this fallacy.) Well business can't pay.
When a businessman tries to pass the mandated rise in labour costs on to consumers he immediately meets resistance. Consumers simply do not have the purchasing power to cover the price rises. (Of course the situation would be different if the government inflated the money supply to underwrite the cost increases). Obviously, if consumers can no longer afford the goods then business can no longer afford to ‘pay’ the wages.
Ultimately all wages flow from consumers –– and we are all consumers –– while purchasing power stems from investment. Therefore, as consumers we are the ones who actually set wage rates. It should be patently obvious that we cannot raise living standards by charging each other higher prices for our services. The only way to raise real wages for everyone is by increasing the amount of capital invested per head of the population. There is no other way. There are no magic puddings and no easy exits.
Unfortunately, the nature of wages and purchasing power is something politicians, particularly Liberal politicians, seem incapable of grasping, not that most businessmen or CEOs are much better.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 12 December 2005