Joes Paycheck

Mr. Summers is a member of the staff of The Foundation for Economic Education.

Early one evening I was on my way to the bank, when my friend Joe greeted me with some good news.

“I got a raise today,” he announced, holding up his pay envelope. “I never thought I’d be able to support my family so well. Sure beats when I was a kid.”

“That’s great!” I replied as we walked along. “These days we certainly do live better, even though our parents worked longer hours.”

“Of course,” he answered. “We have better technology. The tools and equipment we use make us more productive. In the old days, workers had to perform most jobs by hand. It used to take a whole crew to do what one man now does faster with a bulldozer.”

“But why does your company pay you more just because technology has made you more productive? Your employer, after all, is the one who provided the machines.”

“I think management is afraid we might bring in a union,” he answered.

“Maybe so,” I replied. “But what would you do if your paycheck didn’t reflect your increased productivity?” “Look for another job.”

“Of course,” I said. “Your company knows that you won’t continue working for them if they don’t pay a competitive wage—union or no union.”

“You are saying that competition, in addition to better technology, has a lot to do with my bigger paycheck.”

“Yes. Many workers use the same technology year after year. Yet even they benefit when other workers are provided with better equipment.” “How’s that?” he asked.

“In a free market, all employers compete for workers. When some employers can offer higher wage rates because improved equipment has made their employees more productive, competition will raise the wages of all workers. For instance, if you want to keep your best laborer from going off to work in a new factory-or taking a job that has been vacated by someone who went to work in a factory—you had better give him a raise.

“Here is another way of looking at it,” I continued. “Improved tools and equipment lead to increased production. With more goods and services entering the market, everyone’s paycheck buys more. Even if nominal wage rates should fall in a deflationary period, real wages would continue to rise as long as investors make more capital available.

“Capital is the key to real growth. Everyone benefits when savers furnish the investment capital needed to create better tools of production.”

“If investment capital is the ultimate source of higher real wages, what about labor unions?” he asked.

“Many people think unions are the reason wages are rising.”

“Have you ever seen a picket line?” I asked.


“Who were they trying to keep out?”


“Precisely,” I answered. “Unions try to increase union paychecks by denying paychecks to nonunion workers. These excluded workers have to settle for whatever jobs are available in the nonunion sector. Because of union obstructions, some workers are prevented from getting better jobs.

“And to make matters worse, unions often wind up hurting the very workers they are supposed to help. Look at the auto and construction unions. Union wage demands have priced many union workers out of their jobs.”

“I see that some unions are trying to protect American workers by supporting import quotas,” he noted.

“Sure,” I replied. “They want to protect union jobs by preventing other Americans from spending their own paychecks as they see fit. Are you and your family helped by such tactics?”

“I never thought of it that way,” Joe said as he cashed his check. “Maybe we should pay more attention to what people do, rather than what they say.”