The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 70

Is Labor Really Overpaid?

Business can't make money today because workers get paid too much, right? After all, isn't cheap foreign labor the reason that U.S. firms are losing out to overseas price cutters? Wrong! The foreigners have more modern, efficient plants. While labor isn't cheap, the real shortage is in business leaders with the innovative smarts to use labor effectively. Ineffective labor always did cost too much.

Sure, the dollar cost of labor rises with inflation, but so do the prices of the things labor builds. The real cost of labor can only be measured by what a laborer can buy with his or her pay. A laborer gets more “real” pay only if he or she is more productive. As labor becomes more skilled, whether through worker's efforts or management's, wages will rise. But who cares if the worker's output rises at least as much?

This chart puts a longer-term perspective on the issue. It shows 690 years of an English building craftsman's buying power, as measured by consumables like food or clothes.

The chart shows that the real cost of labor approximately doubled in the 186 years from 1264 to 1450. Then it lost all that gain in the next 180 years. A builder in 1800 could buy relatively little more than his predecessor 200 or 500 years earlier. Then, starting in 1800, the real cost of labor roughly quadrupled by 1954.

What does that mean? To find out, rely again on your financial calculator. That steep 1800–1954 rise is a compound real pay boost of 1 percent per ...