The Economics of Welfare

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

Part III, Chapter XIX


§ 1. IN Chapter XVII. we considered the effects of interference designed to raise the wages of a low-paid industry, or part of an industry, above the "fair" level. The centre of the problem was the wage of the "average" worker, and it was tacitly supposed that the rates paid to workers above and below the average would be adjusted according to their comparative efficiencies. We have now to consider a different type of interference, directed not so much towards trades as towards individuals. Granted that the average worker in all—or in most—industries is suitably remunerated, the very inefficient worker in some of them will, on account of his inefficiency, if paid on a like scale, often earn so small a sum of money that the public conscience is shocked. It is widely held that this state of things ought to be prevented by the legal establishment of a national minimum day-wage, below which no workman whatever can be legally engaged. This policy, it must be clearly understood, differs in essence from, and goes much beyond, the mere establishment of a national minimum day-wage from which under-rate workers are exempt, as described in Chapter XV. § 7. It is illustrated—though very imperfectly, since the minimum fixed was very much below the worth of anybody except an extraordinarily inefficient apprentice—by certain of the labour laws of Australasia. The Parliaments of Victoria and South Australia "have decided that no person whatsoever can be employed there in a registered factory, without receiving some minimum remuneration—in Victoria, 2s. 6d a week, and in South Australia, 4s."*79 In like manner, the New South Wales Minimum Wage Act of 1908 provided that no workman or shop assistant shall be employed, unless in receipt of a weekly wage of at least 4s., irrespective of any amount earned as overtime.*80 Again, in the Factory Act of New Zealand, it is enacted that every person who is employed in any capacity in a factory shall be entitled to receive from the occupier payment for the work at such rate as is agreed on, in no case less than 5s. per week during the first year of employment in the industry and, thereafter, an annual increase of not less than 3s. weekly till a wage of 20s. per week is attained.*81 This clause in its original, form—the form given above is the slightly modified form of the 1907 amendment—was passed in order to prevent persons being employed in factories without "reasonable remuneration in money." Payment is always to be made irrespective of overtime, and premiums are forbidden.*82 The same idea is embodied in the statute by which the State of Utah in 1913 fixed a minimum wage for all "experienced" adult women of 1.25 dollars per day, no exceptions to this minimum being allowed even for defective workers,*83 and in a flat-rate law of the same general character enacted in the State of Arizona in 1917.*84


§ 2. Now, as was shown in Chapter XVII. § 8, any attempt to force the wage rate of low-grade workpeople above their "fair" level, so long as the area over which it is extended is narrow, may be rendered inoperate by a perfectly legal form of evasion, namely, a reshuffling of workpeople of different grades between this area and occupations not included in it. When, however, the State interferes to establish a national minimum time-wage, the area affected by its action will not be a narrow one. On the contrary, it will be more or less nation-wide, leaving no field free into which low-grade workers can be pushed to be paid a derisory wage. Evasion by way of a redistribution of work among workers of various qualities is, therefore, altogether excluded. Hence the effect produced upon the national dividend may prove serious and substantial.


§ 3. It is probable that the enactment of a national minimum time-wage will incidentally prevent the payment of certain low wages that are unfair, in the sense that they are the result of exploitation, i.e. the payment by employers of less than their workpeople's services are worth to them. The forcing up of this sort of low wage will, as was explained in Chapter XIV., react favourably upon the size of the national dividend, by strengthening competent employers in their competition with incompetent rivals. Nor is it only in this field that advantage will be won. Even when low wages are fair wages, in the sense of being proportioned to efficiency, it does not necessarily follow that a higher wage will not be fair also. For, as was shown in the preceding chapter, if only an incapable worker can be secured good payment for a little while, he or she may be so far improved in capacity as to become worth the higher wage. In so far as these things happen, the national dividend will be pro tanto benefited. Obviously, however, these are mere incidents, by-products as it were, of the establishment of a national minimum wage, and not the main consequence of it.


§ 4. This main consequence is the expulsion from private industry of a number of low-grade workers—the number being greater the higher the level at which the national minimum wage is fixed. When it is enacted that low-grade workpeople shall not in future be paid rates as low as many of them are now receiving, it necessarily follows that some of them will no longer be worth employing. Of course, not all those who are now worth less than the new wage will be affected in this way, because the withdrawal of some workers from private industry increases the worth of those that remain. Some, however, of those not now worth the new wage will still not be worth it when it is established. The proportion that these make of the whole will be greater or less according as the demand for labour is elastic or inelastic. It is sometimes argued that this demand is highly inelastic, upon the ground that in certain special industries, such as the chain trade, there is statistical evidence that the demand is of this character. But, when it is a question of a general minimum wage, it is the demand for labour as a whole, and not merely in particular industries, that is relevant; and, whether from a short-period or from a long-period point of view, there can be little doubt that the elasticity of this aggregate demand is much greater than the elasticity of the special demand of the chain trade.*85 Hence the number of low-grade workers, that the establishment of a national minimum wage substantially higher than the wage they are now worth will render not worth employing in private industry, is likely to be considerable. Some of these, no doubt, employers will still keep on from kindliness or old association. But many will lose their jobs, and, consequently, will have no opportunity to reap improved capacity from improved earnings. As far as they are concerned, therefore, there will be no indirect gain to the national dividend; and there will be the obvious direct loss that their labour is withdrawn from production in private industry. No doubt, some of them might be set to work in State-controlled institutions. But the enforced labour of assisted persons in institutions invariably yields but little product; and, therefore, the main part, at all events, of their capacities would be wasted.


§ 5. Under a régime of complete aloofness and passivity on the part of the State this effect would be dominant, and there can be no doubt that the national dividend would be injured. In the actual world, however, it must be remembered that a well-organised system of care for the poor may rebuild the strength of persons who, through unemployment, fall in need of public relief, and may accord to them, in farm colonies or elsewhere, an economic training of which they can afterwards make use. It follows that the establishment of a national minimum time-wage, though it will, for a time, cause the withdrawal of some persons from effective production, need not, even in respect of these persons, harm the national dividend in the long run, provided that it is associated with a well-organised State policy towards the poor on the pattern that will be exhibited in Part IV. of this volume.


A little reflection shows, however, that the benefit to be looked for in this connection is more apparent than real. The establishment of a national minimum time-wage would accomplish very little more than could be accomplished without it. If there is not a well-organised system of care for the poor, there is no reason to suppose that any of the persons expelled from private industry by the operation of the minimum will be trained and rehabilitated; and, even if there is such a system, only those persons will come in contact with it, and so secure its benefit, who do not belong to families able and willing to support them without State help. But, if there were no national minimum, most of the people, whom the minimum expels from private industry, would, since the minimum itself will presumably be a low one based on a consideration of what is essential for subsistence, be earning so little that they would be nearly sure, in one way or another, to come into contact with the State organisation for looking after poor persons. This organisation, therefore, will have much the same opportunity for withdrawing from private industry those suitable for training, or those needing treatment for sickness, as it would have if there were no national minimum wage.


Nor is this all. It has to be remembered, further, that by no means all those persons, who are prevented from working at ordinary industry by the establishment of a national minimum time-wage, will be in a position to derive benefit from State training. There will be no hope of this kind for old men who have hitherto done a little work and have derived the remainder of their support from their families and friends. These men will simply be precluded from rendering those partial and occasional services to industry which they are both able and willing to render. Elderly women home workers and younger women workers in factories, who are of low capacity and are partly supported by husbands and fathers, will be in like case. So also will State pensioners and others who would gladly work up to their capacity and thus help to support themselves if they were permitted to do so. The driving of these persons into idleness will inflict definite and uncompensated damage upon the national dividend. Consequently, if damage is not to be done, it is essential that, in any law establishing a national minimum time-wage, provision shall be made for excepting from its operation would-be workers of the above type, whom there is no serious prospect of rendering more efficient by training. But a satisfactory arrangement effecting this, which should not at the same time effect a number of other things that are not desired, is extremely difficult to devise. Until it is devised we may fairly conclude that the establishment of an effective national minimum time-wage (effective in the sense of being substantially above what a considerable number of people are earning now) is likely, on the whole, to damage, rather than to benefit, the national dividend. No doubt, in the absence of such a minimum a number of low-grade workers, particularly low-grade women workers with families, will be left in private industry with earnings insufficient to maintain a decent life. This evil, as will be urged with emphasis in Part IV., it is imperative to remedy. But the cure for it consists, not in establishing a national minimum time-wage at a level that will drive low-grade women workers out of private industry altogether, but by the direct action of the State, in securing for all families of its citizens, with the help, if necessary, of State funds, an adequate minimum standard in every department of life.

Notes for this chapter

Aves, Report on Wages Boards, p. 88.
Labour Gazette, March 1909, p. 103.
Cf. Aves, Report on Wages Board, p. 88; and Raynaud, Vers le salaire minimum, p. 335.
Ibid. p. 88.
The World's Labour Laws, Feb. 1914. p. 47.
Cf. Douglas, American Economic Review, December 1919, p. 709. Cf. also Bulletin of the U. S. Bureau of Labour, No. 285, pp. 22 et seq.
Cf. post, Part IV. Chapter III. § 8.

Part III, Chapter XX

End of Notes

56 of 73

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