Reply To: Wages


The wage for each type of labor service is determined by demand and supply.

The choice the worker makes to supply his labor to a particular entrepreneur is based on his assessment of the value of the alternative compared to the value of the employment opportunity with this entrepreneur.

The choice the entrepreneur makes to demand the labor services of a particular worker depend upon the entrepreneur’s assessment of the marginal revenue product generated by the labor service discounted by the rate of interest if the entrepreneur pays the worker in advance of selling the output he helps produce.

Because both supply of labor services and demand for labor services depend upon the workers’ anticipations and the entrepreneurs’ anticipations there is no way for an economist to accurately estimate what the wage would be under different conditions. The economists can determine whether the wage would be higher of lower under different conditions, but the quantitative magnitude of the difference cannot be objectively calculated.

Market wages will always reflect the DMRP and opportunity cost of the labor services given the circumstances, including government interventions, under which the trade of labor is conducted. But what the exact wage of a labor service would be in the absence of government intervention can only be estimated imprecisely.