The Basic Criticism of Wootton on the Existing Theories of Wage Determination - Literature review Example

Introduction Setting up an effective wage policy is one of the most challenging tasks a government has to undertake because it requires a lot of balancing acts to manage the different aspects of the policy setting. The existing theories of economics emphasize that the determination of wage rates is largely based on the self interest and the bargaining power. The higher both the elements more wage differentials may be experienced. However, the social norms of a society also tend to shape the wage determination. The earlier theoretical attempts outlined the need for having the social dimension to the overall process of wage setting and as such advocated against the demand and supply factors as the only contributors towards determining the wage rates. The idea was to determine the wage rates in accordance with the assumption that it should be acceptable to both the worker and for whom he tends to work. This whole element adds the more social orientation to the overall setting of wage rates and wage policy. Mrs. Barbara Wootton was one of the major voices in favor of the setting up the wage policy keeping in view the social aspect of the issue as her main contentions included the debate on the assumption that the existing pay differences cannot be wholly determined by the economic theories and as such the national wage policy shall give most of the annual rise to those who are already underpaid. She was also quite vocal against paying in accordance with the prestige and advocated the integration of social concerns into designing and implementing the overall wage policy. As such the wage determination is the result of both the social as well as economic factors and one overcomes other only if it is stronger than the other. This research paper will discuss the arguments of the Wootton and her arguments presented into her book “The social foundations of wage policy” chapter # 1 on “The Economist theories of Wages”. Economist theory of Wages Wotton begins her assault on the economic theory of wage determination by outlining that the wage determination in free market economy is just an extension of the general theory of value. Therefore, in the absence of any controls, the wages are determined by the forces of demand and supply. Wootton is also of the view that the issue of wage determination, despite having greater social as well as political orientation has got very little attention from the academic circles as most of the English economists have failed to give a more serious thought to the overall process of wage determination. Wootton mentions Hicks as one of the most important economists to outline the idea of the wage determination and his book “The Theory of Wage” is considered as one of the most important books in economic thoughts as it is believed to be influenced the later economic thoughts on distribution of wealth specially. In his book, he outlined some of the most critical contributions every made to the theory of wage determination. Hicks argued that the value of the labor equals the marginal productivity of the labor i.e. the price of labor is determined by the prices of the product multiplied by the marginal productivity of the labor. According to Hicks, this marginal productivity of labor therefore creates the interest however; there have been scathing criticism of the Hicks ideas as many economists now believe that the Hicks’s ideas do not work under the non-competitive market conditions. Subsequent ideas of Hicks also included his theoretical attempts to define the theory of collective bargaining, as well as he clearly recognized the role which collective bargaining plays into the wage determination. In this regard, he explicitly mentioned the role of strikes as the weapon used by the labor to pressurize the management of the organizations to move wages rates in their favor. (Sapsford, 1981, 115). Hicks view the collective bargaining in terms of incurring higher costs if the employer does not come up with a solution which is economically beneficial to him. However, as a result of such process, the unions get more power into the organizations. Wotton, however, is of the view that these ideas are merely based on the general theory of value which itself is based on assumptions as well as artificial models. What Wootton sees is the inability of these ideas and theories to successfully transform themselves into the practical ideas for the real world as according to her, most of the ideas of Hicks are fundamental deficient to move from mere “theoretical abstraction to concrete reality”.(Wootton, 1955,12). Her more scathing criticism comes in the form of the attack on the very foundations of the basic economic theories of wage determination by outlining that the ideas of the Hicks are nothing more than theoretical abstraction which is, in fact, belongs to that theoretical ground which is based on utopian thoughts of perfect competition as well as acquisition. The urge to get more money. Therefore, outlines that economics is a rational science which advocates the personal interests. However, as Wootton describes that in this so called imaginary world, employers compete with each other to get the labor at cheap rates whereas employees compete in order to get more and more wages. From sociological perspective, such struggle creates a rift between the different classes of the society and as such creates the so called class struggle where those with higher bargaining power tend to get higher wages and those with lesser bargaining power despite having the same level of skills do not get the relatively equal amount of pay because of their inability to bargain in their own favor. Wootton further went on to argue that the very definition of the labor as defined under economics terminology is wrong because it assumes that labor includes those which share the same level of skills. However, in reality labor is often labeled as those individuals who have attained just the lowest level of skills. Therefore, as such theoretical attempts by the economists to define the labor and related theories are fundamentally wrong. Classical economics theories often considered the affects of the frictional unemployment. However; they failed to take into account the general employment. As such Wootton is of the view that these theoretical attempts lack the ability to take into account the cumulative effect of the changes in the wage rates on the society as a whole. Wootton’s this criticism is also based on the fact that perusal of having cheap labor ultimately creates wider and more significant impacts on the society. Therefore, if the assumption that the employers shall pursue only cheap labor is faulty because it would result into the productivity losses and as such the overall impact on the economy of the country is much larger than the perceived. Wootton also went on to argue the assumption that the supply of labor is fixed as assumed by most of the Pre-Keynesian theories, is an elusive concept too as such concepts fail to take into account other factors such as interchangeability of labor, the methods of production. Such theoretical attempts, according to Wotton, are therefore, only assuming labor as the only component of the overall production process and as such other matters shall not be considered while determining the equilibrium wage rates. The implications for such an inability of the existing economic theories, therefore, very vividly present the fact that such theoretical attempts were largely made in favor of the employers rather than the employees as they seem to put employees i.e. labor under different circumstances than the employers. Wootton also discusses the assumption that the availability of labor i.e. the supply of labor is fixed as assumed by most of the economics theories. However, under various external conditions, the demand and supply of labor can change as the inflow of new labor into the market or shortages of critical skill employees may very well change the overall dynamics of demand and supply in the market. Further, Wootton discusses that the demand for labor, in some professions, is an indirect demand as it is driven by the increase in the demand for the very goods and services that labor produce. Therefore, if that demands decrease, the demand for the labor would decrease too and as such the assumptions that the supply of labor is fixed can easily be displaced because of the fact that the labor which is no more in demand in a particular profession may find other professions to join. Therefore, the overall impact of such changes on the economy of the country hardly changes the existing wage structure. The overall argument of the Wootton is therefore, based on the scathing criticism on the very foundation of the economic theory of wages as she successfully demonstrates that the underlying concepts which are ruling the academic circles for determining the proper wages rates are mostly biased and based on assumptions and ideas which are far from the reality and lack the ability to capture the reality of the market in more accurate terms. Therefore, such theoretical assumptions shall not be fully relied. The next part of the chapter begins with the discussion of the collective bargaining and the role of unions. Wootton begins with the assumption that most of the economic theories of wage rate determination are based on the individualistic approaches and lack the proper integration of the role of collective bargaining and unions into influencing the wage rates. Wotton, however, agrees that the later attempts have taken the issue of collective bargaining. However, it has been taken from a slightly different perspective than the one which should have been taken. The economic theories which outlined the wage determination are based on the assumptions of perfect competition. However, while dealing with the issue of collective bargaining, they are more prone to discussing the collective bargaining power of unions as an example of monopolistic competition. Wootton, therefore, argues that the wage theories lose their traditional beauty and simplicity by making a transition towards the monopolistic competition by deviating from the perfect competition. As such Wootton also considers that the attempt made by the economists to define the collective bargaining process is itself again based on the assumptions of self interests as the unions, as collective bargaining agents, are viewed as the sellers of the labor. Therefore, they tend to act in a way which maximizes the economic benefits for their labor. This assumption, therefore not only changes the fundamental correlation between the labor and the employer but also tend to dilute the earlier theoretical attempts by distorting the earlier made assumptions of perfect competition. At this point, Wootton again seems to contradict the ideas of Hicks by arguing that the Hicks have basically diverted from his own ideas of competitive market for labor as he attempts to define the relation between unions and employers just based on the calculation of costs which each party to the bargaining process would incur and as such the outcome of the collective bargaining process would be according to those costs. Wootton also seems to attack the assumptions of marginal productivity under the collective bargaining conditions as according to these assumptions, the higher marginal productivity will lead to high wages which would ultimately increase the total unemployment in the industry. In the presence of such empirical possibility, the unions may get away with such frictional unemployment by citing the reasons which indirectly point out the employer at the receiving ends. However, according to Hicks, Unions tend to lose in the collective bargaining process as their actions will be offsetting by the subsequent changes in the different economic variables. Wootton also went on to discuss the ideas of the Professor Rowe that the trade unions tend to modify their behavior during the collective bargaining process because a unionist also tends to know that demanding a raise above a certain level would add up to the unemployment. Therefore, the subsequent changes in their behavior tend to normalize that equation between the employer and the employee and as such tend not to lose much as anticipated by the Hicks and others. Further, Rowe also argues that the pressures from the unions to raise wage rates above the equilibrium prices may force employers to look for more innovative methods of production which reduce or keep their overall costs within their control. Therefore, as such the unions may get away with the larger share in the overall collective bargaining process as against the assumptions of classical economists. This explanation, therefore, also indicates a significant transition from the earlier established thoughts of classical economists by broadening the overall scope and breadth of the classical economists. Wootton, in the end, also discussed the Post- Keynesian attempts to redefine the wage theory as the existing ones under the classical economics were insufficient and were just based on the demand and supply forces of the labor. One of the basic assumptions under the classical economic theories has been the assumption that the demand schedule of the labor is elastic. However, later attempts made by the Keynes outlined somewhat opposite of the same as Keynes argues that the labor prices are sticky downward. Wootton, however, discusses the fact that during the war era, UK’s economy almost achieved the full employment level which was in-lined with the classical theories of economics and against the assumptions of Keynes that the assumption that the economy can work at the full employment level is little unrealistic. However, Wootton considers war as the only reason for forcing UK’s economy to achieve the full employment as the resources were stretched in order to keep consistent supplies for war. According to Wootton, the later additions made to the theory of wage determination were largely based on the issue of collective bargaining and how it can force employers to be more technology oriented as well as make more innovative moves to rely on physical labor for producing goods and services. Conclusion The basic criticism of Wootton on the existing theories of wage determination is based on the very assumption that the foundations of the existing base of economic theories are not plausible as it lacks the strong theoretical foundations. The matter discussed above indicates the gaps between the pure theory and its practical application to the real world. Accordingly, Wootton is of the view that the current economic theory lacks the mobility as well as seems to be prey of monopolistic maneuvers. It not only digresses from the original assumptions but also tend to make a significant theoretical transition by taking giant leaps from one place to another without creating the relevant theoretical links between such events. Wootton’s basic criticism is therefore, is not only how the classical economists violated the established principles of theory forming but also tend to be biased in making their assumptions. The theoretical deficiency of these economic explanations therefore needs not to be taken as correct in their entirety. References 1. Sapsford, David (1981). Labour Market Economics. London: Taylor & Francis. 115. 2. Wootton, B (1955). The social foundations of wage policy. London: George Allen and Unwin. 1-28 Read More