A fair day’s wage for a fair day’s production

The phrase ‘A fair day’s wage for a fair day’s work’ has a long history. It has been used by people such Friedrich Engels and Franklin D. Roosevelt. But it is based on a fallacy. That fallacy is that reward (wage) is or should be related to effort (work). But, as I wrote recently, the essence of economic growth is not an increase of effort but, instead, a decrease of effort for each unit of output produced.

If we look around the world and through history, we see that there are many people who have worked very hard who are paid little. This is because, for all their effort, they are not very productive.

A fair day’s work in Bangladesh

Nobody works harder than the Bangladeshis.

According to a 2012 report in The Lancet, Bangladesh has the most physically active population in the world. As one write up said, “Bangladeshis are exceptionally active due to the country’s primary industries which require physical labour. Most Bangladeshis earn a living through agriculture, primarily cultivating rice and jute but also maize and vegetables.”

And yet, for all this effort, there is little economic reward. Of 199 countries the World Bank has data on for GDP in 2012, Bangladesh ranked 175th. Bangladeshis, on average, work very hard, but produce very little output. As a result, despite their physical efforts they remain poor.

For the most part, the reason poor people in poor countries like Bangladesh are poor is not because they are lazy. Indeed, they often expend more physical effort than workers in the developed world. They are poor because, for all that labor, they aren’t very productive. By contrast, American farmers, with their capital inputs to leverage their labor, work less physically but produce far more. According to World Bank data, in 2012 Agriculture value added per worker was $61,634 in the United States. For all that back breaking labor, in Bangladesh it was just $662.

Higher productivity drives higher wages 

And this higher productivity drives higher incomes.

Broadly speaking, if the price of maize is, say, $160 per metric ton, then a farmer who produces 100 tons in a day will generate $16,000. A less productive farmer, producing, say, 1 metric ton daily, will generate $160. So, productive US farmers and ranchers earned a total household income of $76,735 in 2015. On a farm of about one hectare, those hardworking Bangladeshis earned just $1,241 annually.

What does this mean for Minnesota?

As we’ve seen, for productivity and earnings it is output not effort that matters. Despite this, the phrase ‘A fair day’s wage for a fair day’s work’ is still with us. We often hear people say ‘I work as hard as X but earn less than them’. But instead of looking at the input – labor – they need to look at the output, production. The question they need to be asking is whether they have produced as much as X.

From an economic standpoint, the maxim ought to be a fair day’s wage for a fair day’s production.

John Phelan is an economist at the Center of the American Experiment.