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Adam Smith and a Living Wage

Adam Smith was a supporter of a living wage for labor because it helped to achieve growth and provided equity between workers. There is enough evidence in Smith’s Wealth of Nations that demonstrates that he supported the idea of introducing public policies with the aim of reaching the living wage. The aim of this paper is to discuss different facts and Smith’s views that prove the necessity of setting the living wage.

In fact, the idea of establishing a living wage concerns not only money but also ethics of work. Usually, most of local campaigns for increasing the living wage are organized by representatives of labor as well as religious and community groups. Thus, this demonstrates that the living wage involves economic and ethnic issues, which lead to the unification of groups with different interests and triggers demand for social justice and acceptance of the role of labor in person’s identity (Figart). The idea of wages that determine the salary not only as the cost of labor but also as the way of securing a living leads to a public policy. Apparently, its major functions are to address the size of the wage and provide the reasonability, fairness and morality of the wage (Clary).

In most cases, a living wage has been defined as a wage equivalent to the poverty line for a family that comprises four people. A living wage could also be defined as the size of the income created by a wage, which enables a family to pay for the shelter, clothing, transportation, food, health care and other basic necessities. Therefore, this definition of wages and income allows one to determine wages that contain both the absolute level of the wage and the measurement of wages that conform to appropriate standards of living and norms of distribution (Clary).

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Smith followed such definition of wages while studying the state of the poor in relation to other people and to appropriate standards. Moreover, he was against the policy of Chine particularly because it led to low wages for employees and poverty of the lower class of society was much more significant than in the poorest European countries (Smith). What is more, Smith was against mercantile policies particularly because they have led to low wages in the countries where they were used. At the same time, wages were quite high in the British colonies in America, which Smith correlated with the positive impact of British Constitution that protected and governed North America because workers of colonies in East India received less due to dominating mercantile companies there (Smith). However, Smith understood that the increase in real wages would cause extension of luxury even for the poor people. Hereby, this means that poor laborers would not be satisfied with the same kind of food, housing or clothing as it was earlier. As a result, they would want higher wages because their spending was increasing together with the increase in their wages (Smith). Nevertheless, Smith believed that the improvement on conditions for people of the lower ranks was beneficial for society.

As state authorities and government policies are able to have an influence on an increase and wages, Smith supported the idea of creating a system of ideal liberty carefully because the following system provided a boost to the economy and triggered growing wages. In fact, Smith was a supporter of the increase since “the liberal reward for labor” had a necessary impact as well as was an important signal of raising national wealth. Another supporting argument for using a system of “perfect liberty” was the fact that it was the only efficient tool of rendering this annual reproduction as much as possible (Smith). Thus, the increase and the system of “perfect liberty” were the ways which poor employees could use for securing high wages and necessary living conditions (Clary).

Smith admitted that wages should be large enough to support labor, and this created the case for a living wage. When Smith concluded that wages are tools that are necessary for a living, he created the case for the living wage. According to the economist, employees had to earn their living performing their work, especially it concerned the ones that did not have any property, and their wages had to be large enough to support them as labor (Smith). Apparently, all these concepts are key arguments of the living wage movement. The endeavor to create certain legislation on the living wage was mainly an attempt to achieve wages that would allow a family to move higher the poverty line. Therefore, appropriate standards of living and norms of distribution are the way of providing equity by which wages are evaluated.

According to Smith, high and growing wages were beneficial for society because they led to growth and fairness. Smith explained this by the fact that most of the society members worked on low-paid jobs so that if they got acceptable standards of living, the whole society would be also satisfied. Moreover, Smith made equity a social measure that needs an appropriate supply of goods or an income to buy these goods. In fact, the price for these goods affects the wage rate. In other words, the wage is usually regulated by two aspects such as the demand for labor and the cost of basic commodities (Clary).

In addition, Smith followed the social measure of subsistence. Talking about social subsistence, it demanded the provision of such wages for labor that would allow them to have a relatively comfortable life. Smith stated that wages were the measures in accordance with which most of people must live; thus, their wages must be large enough to support the laborer and their family. Smith also believed that workers had to receive a fair share of what they produced. The share should be significant enough to maintain a worker’s life and enable them occupy a fitting place in society. In fact, people should be ashamed to appear in public with their level of wages. Instead, they should be socially active. Thus, the social definition of wages is very close to modern definition of a living wage.

Another aspect is the discussion of the wage contract. Smith stated that masters were supposed to have advantage over workers due to few reasons. In particular, he admitted effects of governmental regulations concerning the size of wages in certain industries and organizations. Smith also stated that some of these regulations were of interest to workers and some regulations were more beneficial for masters. Moreover, he did not support the regulations that set the highest level of wages and that were adopted at the counsel of masters. In fact, Smith criticized the absence of acts that would prevent masters from reducing wages. However, there were acts against raising wages, which Smith did not approve by explaining his dissatisfaction due to the appearance of unfair wage discussions in the result of these acts. For example, Adam Smith criticized the law of the 8th of George III, adopted in 1768, which limited the wage level that masters could offer. At the same time, Adam Smith supported the law that forced masters to pay their workers in money and not in products. The reason is that he believed that this helped to achieve fairness and equity as well as defended the rights of workers.

Smith’s social measurement of wages was favorable for wages close to profits and output prices As high wages led to an increase, high profits, but not wages, caused a raise in prices and change of the location of capital (Smith). Therefore, Adam Smith disapproved of the actions of merchants and manufactures that complained about negative effects of high wages on growing prices, which provoked the reduction of sales. At the same time, Smith turned attention of his readers to the fact that merchants and manufactures did not say anything about the negative effects of high profits and the growth of their own gains (Smith). However, the truth is that high profits have more chances to provoke the growing price of work than high wages.

Smith believed that interests of labor and land correspond to the interests of society for payment, and rents grow as the wealth of nation rises. At the same time, the interests of producers and merchants, who need profit for a living, are different from interests of society because profits reduce with wealth and the level of profits is usually lower in rich countries and higher in poorer countries. Moreover, the highest level of profits is an indicator that certain society is going to fail soon or is closer to destruction than the rest of societies (Smith). As the interests of producers and traders are completely opposite to the interests of the majority of members of society, Smith connected the wealth of a nation with a level of productivity of land and labor.

The Smith’s theory about minimum wage can be also demonstrated in the form of a formula. Thus, W defines the reproduction of a living wage. Smith stated the growth rate of the population is a raising function of the wage with a zero level of growth addressing to

Wˆ. Hereby, this could be taken as a first approximation. Smith calculated that the supply of labor is dependent on demographics not on the level of wage. Thus, one could write this as ∆Ls = f(W − Wˆ ) f(0) = 0; f > 0 . Adam Smith also believed that the growth of overall demand for labor is managed by the rate of generated “stock” or capital, so ∆Ld = g(r) g(0) = 0; g> 0. If the labor market begins to study in equilibrium, with Ls = Ld, then the maintenance of equilibrium needs that ∆Ls = ∆Ld. If to set the first and second equations equal, the f(W − Wˆ ) = g(r).

In conclusion, Adam Smith supported the idea of creating governmental policy to defend the interests of workers and improve their life. In fact, he did this due to several reasons. First, Smith believed that poor labor comprised the majority of society, so society could achieve wealth without prosperity of the lower class. The specialists argued that the level when society was defined as a good society was determined by the level according to which poor people were able to succeed. In other words, the success of society was directly dependent on the opportunities to succeed within poor laborers.

According to Adam Smith, the establishment of a living wage plays a key role in the improvement of workers’ well-being. In particular, he believed that the level of wages had to be significant enough to maintain labor, which means that workers had to be able to pay for their house, transportation, food, clothing, health care and other basic commodities. However, Adam Smith did not provide the specific outline of a policy to transform his idea about living wage into legislation. Nevertheless, the impact of Smith is significant in the context of the living wage because he was the first who realized economic progression and changes of wages levels over time and predicted the ways in which wages would evolve next.

After reading the researcher’s notes, it is possible to say that Smith understood and supported the necessity of governmental interference in the level of wages. He did not approve all the governmental actions, but he realized that a certain policy is necessary because the absence of any public policy would lead to the reduction of living standards of workers. As a result, the nation would be able to achieve wealth because the nation’s success is closely tied to the prosperity of poor citizens. According to the Smith’s system, as society develops, certain moral and legal norms are necessary for its management, which would help to achieve stability. On the other hand, significant income inequities, a very high relative degree of profits and low wages are risk factors for the stability of society and could lead to the reduction of social communication within the country and failure in the economy. It is believed that countries with the lowest profit levels are the richest, whereas countries with the highest profit levels are the poorest. Therefore, merchants and producers should not try to achieve high profits for any cost because it would damage the economy where they operate.

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