Labour economics in a capitalist system

Monojit Chatterji, University of Dundee
Put online November 2009

The following is extracted from A Case Study in Efficiency Wages, one of the resources made available through the Lecture Notes page of the TRUE wiki for Labour Economics. This text is licensed as Creative Commons, some rights reserved.

Capitalism is a form of economic, political and social organisation which dates back at least 200 years. Two of its important features are: (1) a legal system enforcing Property Rights and Contracts and (2) a widespread Factory system. The importance of the legal system lies in the fact that it enabled investors and traders to have a form of security guaranteed by the State. Some important features of the Factory system are:

  1. Use of Modern Technology;
  2. Large scale Production;
  3. Task specialisation and Team work;
  4. Wage Payment as remuneration system;
  5. Business Organisation;
  6. Marketing.

Setting up and establishing a factory might require some of the following steps:

  1. Getting together a team of partners;
  2. Choosing a Product;
  3. Finding and acquiring Site;
  4. Technology;
  5. Raw Materials;
  6. Power;
  7. Work Force & Human Resources;
  8. Organisation of Production;
  9. Marketing.

This entire process is led by a single goal – that of maximising profits. The case study will primarily focus on the link between human resource management, productivity of the work force and profits of the company. The implications for employment will also be studied.

A necessary condition for profit maximisation is that costs are minimised , given the scale of output. Once the technology has been installed, the major costs of production are power, raw materials, and labour costs. Of these, perhaps the most important is labour costs. Hence any profit maximising strategy must involve producing the required output at the lowest possible labour costs.

What does this imply for the wage policy of the business? At first blush, it might seem that the business should pay the lowest wage it can get away with. That is to say, part of any profit maximising strategy should include paying the workforce its opportunity cost only. But what if paying very low wages actually reduces the productivity of the work-force as a whole? It is then not clear that a wage policy of paying the rock bottom wage necessarily minimises labour costs. A more sophisticated wage policy may be required. Furthermore, productivity is also affected by the work ethic and control system that is used to discipline the work force. We shall study all these strategic decisions.

Read the rest of the case study.

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