Fair Pay - How Do We Decide?

What constitutes fair pay for the work an employee does? Is there even a need for the concept at all, or is whatever the market determines all that matters? I happen to think that the market should determine this in general, but that does not exclude the possibility that people are paid an unfairly low wage at times.

A Market Wage

If you go out to buy a car, and one dealer is willing to sell the model you want for less than any other dealers, and even less than you think the car is worth, do you offer to pay more? Of course not. You also don't offer to pay more for your oranges or cookies when the grocery store is selling them for less than their cost for whatever reason. In general we all try to get the best price for things that we can.

Why would it be any different for an employer looking to buy labor? If you are willing to work for him for $8 per hour, isn't it natural for him to pay just that and no more? If three competent guys offer to mow your lawn, you would likely choose to employ the cheapest, right? The point here is that there is nothing nefarious about an employer trying to hire help at the wages which have been determined by the market.

In good times wages rise because there are more jobs available than people to take them. In bad times we can see pay drop because when there are more workers than jobs employers are able to attract help at lower pay. But in all times in a free and open marketplace and country, wages are generally an honest agreement between an employer and employee. In other words, whether we complain about the wage and whether it constitutes fair pay, we do not have to take the job. In taking it, we have decided that it is in our own best interest.

Looked at in this way, we can see that perhaps the concept of a "fair" wage is not all that it seems to be. In fact, there are some people who would love to be paid to sit and watch television and count commercials for $4 per hour, making that a fair wage, despite the fact that it is far below the minimum wage and is therefore illegal. If an employer offers a certain wage and an person agrees to work for that, it is difficult to argue that it isn't fair.

Fair Pay

It is difficult to argue that a freely agreed-upon wage is unfair, but not impossible. Sometimes other circumstances are involved, and that can make a difference. One obvious one is when the employee are not legal residents. His or her options are limited in that case, making it possible for an employer to exploit such employees, paying far less than he would otherwise, and even withholding promised pay.

Then there are the many circumstances when the an employer has certain advantages that allow him to ignore the usual market forces which determine pay. For example, a business owner might hire employees who have criminal records, and even if the crimes are not relevant to the job, she might pay these employees less than others because she knows they have a hard time getting a job due to their records. This, to me at least, is unfair.

On the other hand, even when there are times when pay is unfairly low, I still think it is best to leave the decision to the employees and the employers. There are many problems with a government trying to decide what is fair pay. One example: I did the math once and found that the entire profit at Wal-Mart would be eliminated is they raised everyone's pay by $3 per hour (labor is on of their largest expenses). If the law forced even a $2 wage increase, most employees would be stuck at that new wage, since there would be little room for raises. This means that it would be difficult for the company to pay more to those who did a better job - not a good result.

There are many other reasons that government control of wages is a bad idea, but that's a topic for another time. It's worth noting though, that even employees sometimes have an unfair advantage against employers. If licensing requirements limit access to a given field, for example, the few who qualify can demand much higher wages than they would otherwise get (think of doctors, dentists, and even real estate agents). This is result not of the market, but of government manipulation of it. Then there are natural cases, such as the demand for roofers and construction workers after a hurricane, that allow employees to take advantage of employers.

In any case, there is fair pay, and there is unfair pay. Most of the time, though, we will be far better off deciding which is which as an honest negotiation between employer and employed, rather than turning to governments to make such decisions for us.

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