The Economics of Welfare

Pigou, Arthur C.
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First Pub. Date
London: Macmillan and Co.
Pub. Date
4th edition.
49 of 73

Part III, Chapter XII


§ 1. THE purpose of the remainder of this Part is to inquire whether, and if so in what circumstances, the size of the national dividend can be increased by interference designed to raise the rate of wages in any industry or part of an industry above the "natural rate." The natural rate is here taken to mean the rate that would prevail apart from interference by some person or body of persons external to the workmen and employers directly concerned. Monopolistic action, whether by employers or by employed, is thus included in the "natural course of things"; and the only interference that we have to consider is interference by consumers and interference by public authorities, acting, not as consumers, but as governors.


§ 2. Interference by consumers consists in attempts by customers to compel employers to grant better conditions to their workpeople by agreeing to confine their custom to those whose treatment of their workpeople comes up to a standard that is considered fair. The scope of this method varies greatly in different industries. It can be applied more readily, for example, to the hours of labour of assistants in retail shops, whom the customers actually see, than to those imposed on factory or domestic workers, whom they do not see.*70 It is always much restricted by the imperfections of customers' knowledge, and by the fact that many articles pass through a number of stages of manufacture before they reach the man who ultimately sells them to the consumer. Associations of private persons have, nevertheless, sought to employ this method through the devices of the White List and the Trade Union Label.*71 It has been employed with greater effect by public bodies which have extensive contracts to offer. The Fair Wages Resolution of the British House of Commons in 1893 endeavoured to secure that Government Departments should use it by demanding that, on Government contracts, not less than "the rate of wages current (in the district) should be paid to employés." The London County Council furnish a schedule of wages, which all firms tendering on their contracts must agree to pay to the workpeople they employ on them. Some municipal authorities insist, further, that no contract shall be given to a firm that fails to pay "fair" rates, not merely on the town's contract, but regularly on all its work. Thus "Belfast and Manchester have standing orders, under which contractors tendering for, or executing, work must be paying all their workpeople the rate of wages, and observing the hours of labour, agreed upon by the organisations of employers and workpeople, and must not prohibit their workpeople from joining trade unions; while at Bradford the contractor gives an assurance that, for three months immediately preceding his tender, he has paid all his workmen the rate agreed upon between the employers' association and the trade union."*72 Interference by public authorities—acting in their capacity, not as consumers, but as governors—has been made familiar by Australasian experience, and now plays a considerable part in this country also. To determine the way in which these different sorts of interference are likely to affect the national dividend is a complicated problem, which it is necessary to approach by stages. In this chapter I shall ask the preliminary question whether it can in practice be made operative, and whether, therefore, it can really affect the size of the national dividend at all.


§ 3. The answer to this question depends in part on the further question whether it is possible for employers and workpeople to evade the recommendations or decrees of the intervening body without being detected. Detection is made difficult by the fact that the contract, which an employer makes with his workpeople for their services, is complex, including, besides the money wage, explicit or implicit conditions as to speed of work, arrangements for the workers' comfort during the work, and also sometimes provision for certain payments in kind. By operating on one or other of these items it may be possible for an employer, if he wishes to do so, to neutralise apparent additions to the money wage.*73 It is not, however, only in this way that undetected evasion can come about. Since a poor man will often prefer to accept a low wage rather than lose his job, collusion may take place between employer and employed, and, as is well known to happen in the Chinese factories of Victoria, a lower wage may be paid actually than is paid nominally. When workpeople are unorganised—and they are specially likely to be unorganised if they are very poor or if they work apart from one another in their own homes*74—even a strong Government, not to speak of a Consumers' Association, must have immense difficulty in enforcing its will. This fact may be illustrated from the experience of our own laws about sanitation, safety and hours of labour for women and children. It has always been found very difficult to bring the smaller and less obvious units of a trade under effective control—especially as to hours of labour—since, in "domestic workshops" and among solitary workers, household and workshop labour can so easily be intermingled.*75 In England at present any place, where employers, working in their own houses, employ persons from outside, is a "workshop," and is subject to the ordinary provisions of the factory law. Any place where employers, working in their own houses, employ only members of their own family, is a "domestic workshop," and its sanitary arrangements, and also, though in a less degree than ordinary workshops, the hours of young persons and children working in it, are regulated. But, when a home-worker works alone in her house for an outside firm, these things are not regulated. Even in workshops and domestic workshops, it is doubtful whether, with the existing staff of inspectors, the rules are satisfactorily enforced.*76 Throughout, the inspectors' task is exceedingly heavy; so much so that, in England, the demand for a larger staff is continually being made. If, however, the kind of regulation we have just been discussing is thus difficult, wage-regulation is more difficult still. As has been well observed, wage rates are not, like sanitary arrangements, hours and so forth, things easily detected by the watch or nose of an inspector.*77 Hence the violation of rules about them can scarcely be discovered except through overt action by the workers; and, when they are not organised, individual workers will often fail to act for fear a worse thing should befall them. The administration of the English Trades Boards Act has been much hampered by this difficulty, especially in its relation to home-workers.*78 Where, however, an effective workers' association exists, this difficulty can be overcome. For the workers, having a sense of solidarity among themselves, will not be terrorised into accepting less than the union rate by fear of losing their job, but will complain to the union officials; and, even when individual workmen do not do this, their officials will play the part of a body of lynx-eyed unpaid inspectors. It is, therefore, encouraging to learn that State action designed to raise wages in depressed industries (e.g. the chain-making industry) has several times led to an improvement in the workpeople's organisation. "One especially hopeful feature in the situation (connected with the establishment of Trade Boards) is that women in the industries affected are taking heart to join their trade unions, some of which have received large accessions of members. A frequent objection to wages regulation has been that it would be useless for unorganised trades, which are the very ones that need it most. The actual fact seems to be that the prospect of wages regulation is encouraging organisation by giving these poor workers the sense of some public support at their back."*79 At the same time, of course, by giving them more money, it makes it easier for them to pay trade union subscriptions. These considerations seem to show that interference, though it may sometimes be baffled by undetected evasion, cannot be thus baffled generally.


§ 4. This broad statement, however, does not do full justice to the difficulty involved in setting up a really watertight system of regulation. When it is practicable for the regulating authority itself to construct and impose a complete scale of piece-rates, there is, indeed, nothing further to be said. But this procedure can only be resorted to over a limited field, because in many industries differences of machinery, factory arrangements, quality of work required (e.g. in making button-holes) and so on, make a different piecerate "appropriate" to different firms; and it is seldom practicable for a Trade Board or other official authority to have the knowledge needed to deal with these differences.*80 Consequently, as the Boards appointed under the British Trades Board Act have often found, the best they can do is to lay down a so-called minimum day-wage as a standard, at the same time authorising employers to draw up a piece-list, subject to the condition that the piece-rate shall allow an "ordinary" worker in their industry to earn the equivalent of this daywage. In view of the fact that payment by the piece is expected to evoke greater effort by the workers than payment by time, the Trade Board Act of 1918 empowered the Trade Boards to fix a higher minimum day-wage as the standard for piece-workers than the minimum day-wage decreed for workers actually employed on day-wages, and most Trade Board industries in which factory work is done on the piece-wage system have availed themselves of this power.*81 There is, however, yet another difficulty. Unless some further provision is made, there is a subtle opportunity for evasion on account of the ambiguity attaching to the term "ordinary." To shut this loophole some definition of that term must be furnished. In the wage-determination given by the Trade Board controlling the paper-box-making trade this is done by providing that any piece-work operation must yield not less than the minimum day-wage to 85 per cent of the group of piece-workers employed upon it by any firm. Thus the 85th worker (out of a hundred) from the top of the scale of capacity is taken to represent the worst "ordinary" worker. But even a numerical definition of this kind will not make evasion impossible. It is still in the power of employers in effect to force down the general standard of pay by dismissing their worst workmen, engaging better men instead of them, and then fixing a piece-rate below what would have been necessary to enable 85 per cent of their original workpeople to earn the standard day-wages. To escape this danger the Trade Board in the tailoring trade fixes a minimum time-wage for "ordinary" workers, and lays it down that, if 85 per cent of a firm's employees are earning this minimum, there is prima facie evidence that the piece-rates established there are adequate. But it permits this prima facie evidence to be rebutted by information that the number of slow workers employed by a firm at a particular rate has been substantially reduced. The 85th man in a hundred is only to be regarded as the lowest "ordinary" worker when the firm has not specially selected its workpeople.*82 The rule established by the Trade Board in the box-making industry is similar.*83 Such a rule obviously leads to delicate questions of detail, which must be referred, in the last resort, to some form of joint Board. Thus, under the Minimum Wage (Coal Mines) Act, the question whether any workman, whom an employer wishes to treat as below the ordinary, can rightly be so regarded, is adjudicated upon by a joint Committee of employers and employed. Under an arrangement of this kind evasion, if not stopped altogether, can, at all events, be effectively checked.


§ 5. Granted, however, that evasion cannot take place without an overt breach of law that is capable of being detected, this does not by itself make interference with the natural course of wages really operative. For it might happen that no sanction was available to restrain evasion even when it was detected. In fact, however, sanctions are available. Even a Consumers' Association commands the weapon of the boycott, and, when it is backed by a trade union, can also call upon that body to exercise in its behalf the weapon of the strike. A public authority controls a large armoury of sanctions. Of these the least stringent is a simple appeal to informed public opinion, like that relied upon in the Canadian Industrial Disputes Investigation Act. On this model, a law passed shortly before the war in the State of Massachusetts sets up a Commission with authority to investigate—through a Wages Board—any trade in which there is good reason to believe that the wages paid to women workers are "inadequate to supply the necessary cost of living and to maintain the worker in health." After a public hearing, the Commission recommends rates of wages, and "issues a decree of its award, together with a list of the employers who fail or refuse to accept it. This list is there-upon published in at least four newspapers, but no further penalty is imposed."*84 It would be an error to belittle the power of this form of sanction. There can be little doubt that the rates of pay of our low-grade workers "would be lower than they actually are but for the effective force of conventional or customary standards."*85 It is probable, too, that the frequency with which the wage of women workers used, before the war, to approximate to 10s. a week was, in some measure, due to the sanction of public opinion. A somewhat more stringent sanction is made use of, for a special and limited purpose, in the English Trades Boards Act of 1909. This Act provides that, in the preliminary period before the determinations of Boards are made obligatory, Government contracts shall only be given to firms which pay the wage rates they have recommended. A more stringent sanction still was proposed by the Australian Excise Tariff Act of 1906, which was afterwards declared by the Supreme Court to be unconstitutional.*86 A differential excise duty was to be imposed upon native manufacturers who paid less than "fair and reasonable" rates to their workpeople. A policy substantially equivalent to this has actually been carried through in a kindred sphere of Australian legislation. "The Bounties Act 1907, the Manufacturers' Encouragement Act 1908, and the Shale Oil Bounties Act 1910, in providing for the encouragement of native industries, provide also for the refusal or reduction of a bounty if the production of a commodity is not accompanied by the payment to the workers employed in the production of a fair and reasonable rate of wages."*87 If these lesser sanctions fail, resort may be had to fines, a sanction which is embodied, not only in the well-known laws of Victoria and other Australian colonies and in the British Trades Boards Act, but also in more recent laws—applicable only to women and minors—which were passed by the States of Oregon and Washington in 1913.*88 In some of these laws there is added also the sanction of imprisonment. Nor has the last word even yet been said. There is a sanction more powerful than fines and imprisonment. For there is always a margin between rates of wages, which employers resent and would elect to resist by a temporary stoppage of work, and rates which would drive them to abandon their industry altogether. Of this margin the State or other public authority can make use in two distinct ways. First, in certain specially situated industries, it can threaten to expel employers from their occupation unless they consent to pay the wage rate which it decrees. When, for instance, as in ordinary or street railways, a business depends upon franchises granted by authority, the terms of the concession may provide that any refusal to accept the authority's decision about wage rates shall cause it to lapse.*89Secondly, in industries in general, if obdurate employers try to pay less than the decreed wage, the State can subsidise workpeople who strike against them, or can even close their works by force. By these devices it can deprive them of any third way between surrender and a permanent change of occupation. Nor is resort to such measures rendered impracticable by the chaotic character of the procedure which they would involve. They cannot be laughed out of court as meaning a ceaseless conflict between the Executive and rebellious associations of employers. For their success is so certain that, if once the Government was understood to be determined upon them, resistance would hardly ever take place. At the worst, a single exhibition of force would be sufficient:

That great two-handed engine at the door
Stands ready to strike once and strike no more.

This form of sanction is the most powerful of all that are available.*90 Of course neither it nor any of the other sanctions is absolute and compelling in all circumstances. Critics can easily show that, when employers are extraordinarily obstinate, interference to raise wages cannot be successfully carried out. But this fact is not relevant to the practical issue. When it is asked how people can be compelled to continue in a particular industry at a loss, the answer is that they cannot be so compelled. But, as was indicated in the chapter dealing with compulsory arbitration, to prove that a law will sometimes fail in its purpose is a very different thing from proving that it is futile. It is not impossible for murderers and incendiaries both to break the law and to escape the penalty. Judges may order a mother to deliver up her child to the custody of such and such a person; but, if she chooses to disappear, or, in the last resort, to destroy either the child or herself, they cannot compel her to obey. Nobody, however, cites these facts as evidence that the general body of our laws is without powerful sanctions. In like manner, nobody ought to cite the fact that the sanctions to authoritative decisions about wages are imperfect as evidence that they are non-existent. They are real and potent. With their help interference to raise wages can be made operative in practice.

Notes for this chapter

Cf. Mény, Le Travail á domicile, p. 173.
The Australian Trade Marks Act of 1905, which directed that all goods sold should be marked with a label, showing whether or not their makers employed Union labour exclusively, was ruled by the High Court to be unconstitutional, on the ground that the Federal title to legislate about trade marks did not permit legislation in respect of marks not designed for the benefit of the manufacturer using them (Economist, Sept. 19, 1908, p. 532).
Report of the Fair Wages Committee, p. 50. Unless the requisition that contractors shall pay standard wages is made to apply to all their work, and not merely to their work on particular contracts, unscrupulous contractors can evade it by employing the same men for part of their time on contract work at full wages and for another part of their time on other work at exceptionally low wages.
In this connection it is interesting to observe that the State Wages Boards of California, Oregon, Washington and Wisconsin are given power to regulate, not merely wage rates, but also hours of work and "conditions of labour" for the women whom they cover (The World's Labour Laws, Feb. 1914, p. 78).
Mr. Lloyd writes: "The chief reason why the grinders both in Sheffield and Solingen have been better organised than the cutlers is that they are more congregated at their work" (Economic Journal, 1908, p. 379).
It is sometimes suggested that the law could be enforced more easily if the giver-out-of-work, or even the landlord, as well as the employer, in a domestic workshop, were made legally responsible for breaches of the law. (Cf. Webb, Evidence before the Royal Commission on Labour [C. 7063-1], Q. 3740.) In Massachusetts responsibility is sometimes thrown on the giver-out-of-work.
Cf. the difficulties experienced in New Zealand and Victoria in enforcing the law limiting the hours of shop assistants. In New South Wales these difficulties are partly avoided by means of a general law regulating the hours for all shops, whether employing assistants or not. (Cf. Aves, Report on Hours of Employment in Shops, p. 12.)
Mrs. Macdonald, Economic Journal, 1908, p. 142.
Cf. Vessilitsky, The Home Worker, chap. vii.
Hutchings and Harrison, History of Factory Legislation, p. 269. For evidence as to the favourable reaction of Trade Boards upon organisation in the tailoring trade, cf. Tawney, Minimum Rates in the Tailoring Industry, pp. 90-94.
For illustrations of this difficulty cf. Tillyard, The Worker and the State, p. 58.
Cf. Tillyard, The Worker and the State, p. 60.
Cf. Tawney, Minimum Rates in the Tailoring Industry, pp. 50-51.
Cf. Bulkley, Minimum Rates in the Box-making Industry, pp. 21-2.
The World's Labour Laws, Feb. 1913, p. 49. A summary of this law and of the similar laws of other American States is given in Marconcini's Industria domestica salariata, pp. 546 et seq.
Report of the Royal Commission on the Poor Laws, Appendix, vol. xvii. p. 377.
Mr. St. Leger, in his book, Australian Socialism, pp. 394 et seq., prints the judgment of the Supreme Court.
Federal Handbook, p. 476. Cf. Bryce, Modern Democracies, vol. ii. p. 245.
Cf. Labour Gazette, Jan. 1913, p. 204. By the end of 1923 seventeen States of the U.S.A. bad passed some kind of minimum wage legislation, but decisions of the courts have since that time ruled most of the laws to be unconstitutional. New laws relying on the sanction of public opinion only, have been passed in Massachusetts and Wisconsin (cf. Minimum Wage-fixing Machinery (Intermediate Labour Office, 1927), pp. 113 et seq.; and Report of the Delegation to study Industrial Conditions in Canada and the U.S.A. [Cmd. 2833], 1927, p. 92).
Cf. Mitchell, Organised Labour, p. 345.
Cf. my Principles and Methods of Industrial Peace, pp. 191-2.

Part III, Chapter XIII

End of Notes

49 of 73

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