One of the most important global social movements to emerge over the last number of years is the movement for a living wage. The idea of a living wage is simple, stating that nobody should have to do any type of work for poverty-inducing wages. Unfortunately this movement is all too necessary due to the hyper-exploitation of the lowest paid workers in all capitalist economies. This class of workers have become modern debt-serfs, since even when working full-time they must continually borrow money just to provide the basic necessities to get by in life. So what exactly do we mean by ‘necessities of life’? Here in Aotearoa New Zealand The Living Wage Movement Aotearoa defines the concept of a living wage as:

   “the hourly wage a worker needs to pay for the necessities of life and participate as an active citizen in the community. It reflects the basic expenses of workers and their families such as food, transportation, housing and childcare.”

In New Zealand independent research by the Family Centre Social Policy has calculated the rate for 2017 to be $20.20 per hour, $4.55 more than the mandatory minimum wage set by the Government. With this modest increase aimed only at ensuring economic necessities are affordable we can see that the living wage is not about having a second holiday to the Islands, or even a first one for that matter. Rather we are simply talking about a wage that allows for a basic but dignified life as a member of society.

Since so little is being asked from those who have so much, it is virtually impossible for corporate capital or its representatives to reject the living wage out of hand. The moral and ethical arguments are all on the side of increasing wages, however the logic of capital is most certainly not. Consequently, in order to maintain ideological appearances, that is, to continue to hide the compulsion to work for less than the value of one’s labour that is the bedrock of capitalist relations, the correct line of argument must be presented.

Historically this argument has been one based on presenting ‘the market’ as a final and legitimate arbiter of the economic value of all commodities, including labour, principally through the mechanism of supply and demand. The great thing about “blaming” the market is that since the market price of any commodity is simply an outcome of the interaction of objective economic forces beyond the control of any single actor, then political action, which is not objective but is biased, ought not to be allowed to interfere. According to orthodox economic theory, over time the market price of a commodity always rests at its true equilibrium value. This value is the outcome of the meeting of all demand for a given commodity with supply produced under competitive conditions. If demand initially exceeds supply, prices will be higher than they should be, giving higher profits. High profits incentivise more producers to enter the market. As a result of more supply being available, prices will drop until it reaches a point below which insufficient profit is made so that some of the producers will stop producing. Then we are at equilibrium and the true value of a commodity emerges.

This is the orthodox theory of market economics in its base form. What follows from this is the claim that since the market is the best mechanism for ensuring efficient production, and since it is outside the control of any agent, then if the market results in some workers getting paid poverty wages, while that is unfortunate, it is also unavoidable. To set the lowest market-given wage higher would be to artificially raise prices and this would destroy market efficiency; At least that is what orthodox economics theory claims, and this is generally the response by right-leaning politicians and owners of capital to suggestions of a mandatory higher minimum wage or a living wage.

In fact, exactly this response has been the predictable reactionary outburst to the recent and commendable decision of the state of California to raise its minimum wage to $15 in phases by 2022, which will be more than double the current Federal minimum wage of $7.25. I would also expect such arguments about market efficiency and the real value of wages to be used by certain political parties here in Aotearoa in response to the growing claims for a living wage. The point I wish to make in the rest of this piece is to show that even when taken on its own terms of supply and demand in a free market, the orthodox economic argument that minimum/living wages distort the free market for labour is false, since there can be no free market for labour to begin with since labour is not a real commodity in the sense that wheat, milk, or automobiles all are. Rather, labour, as Karl Polanyi noted, is a fictitious commodity that is not produced for sale on the market. Therefore market theory cannot apply to labour.

Labour as fictitious commodity

As we have seen, basic economics theory 101 shows us that in a free market prices will eventually settle at an equilibrium level reflecting the lowest price at which demand can be met while at the same time a reasonable profit can be made. But what is true for real commodities is not true for labour. For example, the current supply of labour is determined by the amount of working age adults in an economy at any one time. Now let us say that the current supply of labour outstrips demand by employers for workers. As we now know from economic theory, if supply of a commodity outstrips demand for it then the price falls since the oversupply favours the buyer, in this case capital. In effect whenever there is an oversupply of a commodity then the buyer gains more power that the seller to set the price.

Consequently, if there is a level of unemployment in an economy this means that there is an oversupply of labour, thus artificially depressing the market value of labour, since supply and demand are not in equilibrium. Now as we also know, if a typical commodity is being oversupplied so that its price is below its equilibrium market value some of the producers of the commodities will drop out of the given market, thereby reducing supply and pushing the price upwards. But this mechanism cannot be easily applied to the so-called commodity of labour, since this belongs to the activities of an actual living person. Labour is not produced for sale on the market; people do not have children in order to supply the market’s demand for workers. This is precisely why Karl Polanyi described labour, along with land and capital, as fictitious commodities.

How do we reduce an oversupply of labour that is causing an artificial depressing of wages, especially in the lowest skilled jobs? Well we can’t just cut production of workers as we would with an oversupply of milk or automobiles. In fact there is no easy way to affect an oversupply of labour, aside from socially destructive and coercive mechanisms such as emigration. Therefore, as long as there is unemployment in an economy there is no possibility of a genuinely free market for labour in terms of supply and demand reaching an equilibrium. Since structural unemployment has been a historical long-term trend in all the advanced economies, including New Zealand, it is clear that an oversupply of labour is a consistent factor that artificially depresses the value of wages compared to what they would be if supply and demand were at equilibrium.

If one were to be cynical (or logical), one might posit that a certain level of structural unemployment is a policy goal demanded by capital in order to keep labour disciplined and cheap. In fact the Polish economist Michal Kalecki wrote in 1943 a very instructive article on this matter called ‘Political Aspects of Full Employment’. Here he argues that just such a policy of ensuring a minimal level of unemployment was indeed a policy desired by capital in order to reign in the power of labour to make wage demands.

To end, it has been shown that increases to the minimum wage, or mandating a living wage is not to artificially distort the market value of wages. Rather these actions serve to reduce the distortion already present due to structural unemployment present in all advanced economies. For this reason legally increasing the lowest wages brings them a little closer to what their market value would be if supply and demand were as freely adjustable as they are with other commodities. Of course a mandated wage value still contains capitalist relations of exploitation, as outlined by Marx. However, the goal here has been to show that orthodox free market theory does not provide grounds to reject a living wage, as is typically claimed. In fact, it provides good reasons to enforce a living wage as a means to reduce an already present distortion in the market value of labour.

Naoise McDonagh is a PhD Candidate at The University of Auckland.