Who Creates the Value of Labor?

Mickey Kaus, writing on the intransigence of UAW president Ron Gettlefinger [h/t Instapundit], observes:

It doesn’t mean Gettlefinger’s workers have a right to $28/hour if at that wage their employers can’t stay in business without an ongoing multi-billion dollar subsidy. I’m sorry if this seems obvious. It’s apparently not obvious enough.

It’s not obvious to most on the Left. One of the basic tenets of Marxism is that labor has intrinsic value that precedes and is separate from the value of management and investing. Most leftists, even those who are not Marxist, have absorbed this concept of the value of labor. 

In reality, the circumstances are the exact opposite. It is the skill and judgment of managers and investors that creates the value of labor. If you don’t own your own company or freelance, you rely on someone else to choose what work you do and how you do it. Their decisions create the value of the products and services you make.  When they make mistakes, the value of your labor decreases and you should charge less for it. 

People who worked for Ford created valuable products that people would pay for because Henry Ford and his successors engineered cars and organized their production and distribution. Without that brainwork the labor of those on the factory floor has little value. They might as well be subsistence farmers. 

This ugly reality means that if managers and investors make a mistake, which happens, a lot, the unit value of workers’ labor to their customers decreases. Since their labor has less value they need to charge less for it. Unfortunately, unions are based on the premise that labor has some kind of intrinsic value independent of whether anyone wishes to trade for the results of that labor. 

I worked for Apple during the 1990s. During the mid-’90s management decided to get rid of Quality Assurance teams and instead just rely on each department to ensure its own quality. The results were disastrous. Every product shipped in an 18-month period in 1996-97 suffered from massive flaws. Suddenly, a company known for its high, even excessive, quality had created self-destructing garbage. This was purely a result of poor decisions at the upper levels yet these mistakes made the work of lower-level employees less valuable. Low-level employees did not have the right to demand that Apple’s customers keep buying inferior products.

Auto unions’ strike-enforced work rules and anti-productivity “job security” demands have seriously interfered with the decisions that the management and investors of the auto companies made.  By overruling the decisions of management, unions have acquired the responsibilities of management. But even if they had not done so, and all the problems of the auto industry rested solely on the shoulders of management, they would still have to charge less for their now-less-valuable labor. 

I know from personal experience that it sucks to work under incompetent management, but that doesn’t change the reality that bad management reduces the value of the labor of workers. Unions need to accept that reality. 

If they don’t, I don’t want my tax dollars paying for their foolishness. 

[update (2009-2-27 12:42pm): After reading some of the comments, I realize that I did not make myself clear. I did not intend to imply that I thought that workers contribute nothing. Instead, I wanted to drive home the idea that workers are utterly dependent on management to make companies successful. That success in turn determines the value of the worker’s work to the consumer and thus ultimately how much the worker can charge for his labor. The only way a worker can hope to remain competitive is to reduce his prices. Unions don’t get this. They have never gotten this. They will try to get the same wages for work of different value. In doing so, they will kill the goose that lays their golden eggs.]

34 thoughts on “Who Creates the Value of Labor?”

  1. …”it sucks to work under incompetent management but that doesn’t change the reality that bad management reduces the value of the labor of workers…If they don’t, I don’t want my tax dollars paying for their foolishness. ”

    just like the victim workers, we taxpayers have no choice about paying for their foolishness. After all, “we won” didn’t they?

  2. The taxpayers are not bailing out the Am auto industry. They are lending them money. The auto industry may or may not survive. Based I what I have seen of the autos being put out and their service record and the huge batch of this and that models rather than a few decent ones, I would bet they do not survive. How many readers at this fine site drive and prefer American cars?

  3. James F. Hurley,

    The taxpayers are not bailing out the Am auto industry. They are lending them money.

    Same thing. Most bailouts take the form of sweetheart loans. The money has to come from taxes today even if its paid back, with interest, tomorrow. There is also the very possibility that it won’t be paid back in full.

    My complaint here is that people want to paid a certain rate as if they had a divine right to it. The idea that the work they do simply isn’t that valuable never seems to occur to them.

  4. The taxpayers are not bailing out the Am auto industry. They are lending them money.

    Wow, those guys sure have a brilliant PR operation if you swallowed that line.

    The money “lent” to the failures is money forcibly extracted from all of us. Even if these failed businesses somehow manage to pay it back, you’re ignoring the opportunity cost; the money that they get is not available to fund competent managers in businesses that produce things we actually want.

    The free market is a profit and loss system. By shielding people from losses, we only prolong the problems.


  5. If you truly do not want these bailouts to happen, do not want them to succeed, then don’t buy their products. Don’t buy GM, Ford or Chrysler cars.

    Buy Toyota, Nissan, Honda, BMW or any other non-bailout car that is made in the USA – pays USA Workers wages and feeds our economy.

    Do this enough and the Big 3 Bailout Boys will fail, being starved from a lack of sales.

  6. This is an absolutely sparkling, pristine post. It’s truth and reality served straight and pure.


  7. Why limit yourself to cars built in the USA? As a consumer you should buy the car that you want that is in a price you can afford and at a quality that satisfies your need or want for safety, fuel efficiency and design. This applies to all industries. We live in a global market. To restrict your purchasing to only one countries goods only supports inefficient industries which are better served being elsewhere – that is, unless those are the best worldwide industries. I think its safe to say that US car manufacturing may not be the world-leading industry at this time that some have claimed it is. Yes, workers will lose jobs, but the skills used in car making are easily portable to other industries, even if the specific knowledge of car making isn’t as readily transferable.

    Now, that said, I recommend Toyota. Smart management and good designs. Not always flashy, but low maintenance and get you from A to Z without breaking down at C, K, L,P, Q, V and Y! Built locally, not because of the workers but because its good business sense to cut out the transport costs and allow just-in-time manufacturing (among other things). I really don’t see the big 3 US car firms getting the hint on any of these points.

    And with the new Obama legislation on emissions control, they have a LOT of work ahead of them.

  8. “We live in a global market.”

    We don’t, really. We live in a world in which the US has been the worlds consumer for a couple of decades, and has done so by putting everything on its credit card. That’s about to come to a screeching halt. And it was never a process properly described as “a global market”.

  9. An additional thought, regarding rhetoric:

    Why won’t the left, in their arguments, ever acknowledge these premises? Why can’t they just SAY, “Yes, it is correct that unionists think labor has some kind of intrinsic value. And while this is incorrect, of course, we nevertheless need unions because of X”?

    Why can’t they ever do this? Why can’t they ever SAY, “Yes, such-and-such proposal will infringe someone’s liberty, but we nevertheless need it because of X”?

    I think that’s a big part of what’s so frustrating about debate with the left: these unacknowledged truths, the refusal to say, “I want to sacrifice this principle for this practical reason.” Not always just unacknowledged, actually — they’re often flipped on their heads. Acts that erode rights are called “rights” (as with much union-related stuff, actually), acts that build dependency are called “freedom.”

    It’s bizarre and frustrating.

  10. The value of a commodity (e.g. my labor) I sell to a company does not depend on the success of the company, except that if the company does poorly the aggregate demand for the commodity decreases, lowering the market clearing price.

    This is true for most of the things a company buys – space, fuel, raw materials, communications services. Why should it be different for labor?

    If I sell widgets to company x, and company x has a great year, do they owe me more money?

  11. I think the post is largely correct, save for the implicit assumption that investors & management are the EXCLUSIVE creators of the value of labor. The level of execution of skilled or even semi-skilled workers affects how much that work can command on the free market, assuming identical management or organizational decisions.

    More creative programmers can create code & solve problems faster; better truckers can drive through a sleet storm & still deliver the goods on time. Customers will pay more for better execution. And that execution always has a volitional, intellectual component. Workers are not bees or drones, to be passively ordered by management.

  12. I’m somewhat sympathetic to this viewpoint, and I certainly like to see free markets defended in these dark times. But I fear this formulation plays into the left’s predilection for centralized control and authoritarian planning.

    My experience is that managers (and especially investors) have only the most superficial knowledge of the activities under their purview. The best ones understand this, and stick to providing only high level direction while encouraging bottom-up spontaneous order. This is increasingly true in modern tech and brain-powered enterprises.

    Once economic outcomes are seen as the work of a few Atlases rather than the distributed choices of many free individuals, it is a relatively small step to granting them czar-like powers and massive bail-outs.

  13. Forgive a layman for saying so, but I’m having a very hard time understanding this post. Isn’t the value of labor exactly what the competitive market of the labor pool says it is? I know that among white-collar workers, it’s quite common to collect job offers just so that you can go back to your boss and tell them what you’re worth. Or does this post assume that a common laborer is worth what management allows them to be worth because they are not likely to engage in this type of salary-testing maneuver?

  14. All those auto workers won’t be able to transfer their skills to other manufacturing jobs, because there aren’t any other manufacturing jobs. The ex-UAW worker will join the hundreds of thousands of other unemployed blue-collar folks in the Rust Belt, and his job will join the millions of manufacturing jobs that have gone offshore never to return.

    Why? Because we have created a business environment where it is impossible for us to be competitive. Americans don’t have any innate skills, talents, or abilities that aren’t found in other countries. What we had was the best playing field in the world, a playing field that rewarded hard work, encouraged risk-taking, and gave people entepreneurial freedom like no other country ever has… and the rules have been gradually changed to kill all of that. China and India are going to eat our lunch, not because they have better workers, but because they’re willing to do what it takes to compete and win, and we’re not.

    If you want to know what is wrong with America, look no further than the US Congress and the ‘stimulus’ bill. This cluelessness, this fiddling while Rome burns, is going to sink our republic… and no one in charge seems to realize this. Obama and his fellow Democrats are too busy salivating over their opportunity to ram through all sorts of pet programs, and are more concerned with building an impregnable majority by catering to their special interest groups than fixing the problem. But then, why should they care. It’s not as if our elected officials have to worry about where THEIR next paycheck is coming from… only the little people have that worry.

    I’d really like to be optimistic about America, but I honestly feel we’re doomed.

  15. Brian,

    I think the post is largely correct, save for the implicit assumption that investors & management are the EXCLUSIVE creators of the value of labor.

    I didn’t mean to imply that worker don’t contribute because obviously they do. Rather, I wanted to reinforce the idea that if the management can’t make a good product the workers have to reduce their own pay to make their products more competitive.

    It might help if you think of workers as contractors to the company that provides the vast majority of their business. If the business is in trouble, they would need to charge the company less just to keep it going.

  16. J.V.,

    Isn’t the value of labor exactly what the competitive market of the labor pool says it is?

    Depends on the perspective you adopt. If you look from the perspective of the company, then the market will dictate what price they pay to fill any particular position. However, if you look at it from the consumers perspective, then the work of people in different companies have different value depending on the value of the product they make.

    For example, imagine you have a choice between hiring two different land scape companies. Each company uses crews of the same size. One company’s management has chosen to invest in tools and training in advanced methods. The second company’s crew uses old tools and just sends their guys out to muddle through. If each company charges the same, which company will you choose?

    Obviously, if the workers in the second company aren’t willing to work for less and allow their less competent management to compete on price, they will soon be out of a job.

  17. Shannon,
    You forgot that the second company is also paying for the health insurance and pensions that the first company isn’t. Therefore their costs to do the job are higher in the first place,making their profits even smaller at the same price as the first company. The second company can’t afford to charge less and stay in business.

  18. Congress, instead, has decided to inhibit the making of the kind of cars at which American makers excel – or at least where they can compete. What’s with that? The buyer be damned never seemed a good working model. Three kids, an au pair & us meant a Grand Caravan – we loved it. Sure, now, as empty nesters, our choice is more fuel efficient. But, would it have made sense to have multiple small cars in those days? Of course, Nancy Pelosi seems to prefer couples like we are now rather than as we were, but I don’t expect the next ten years to be the most productive of my life – indeed, I hope that I’ve retired before they end. All these considerations – like Shannon’s clearly honed and logical observations – indicate we may well have fallen down the rabbit hole.

  19. A number of the replies to this post have taken the position that labor from 1 company has the same value as labor from any other company. I agree with that as applied to the individual worker, but for a company as a whole the value of its labor is what the consumer is willing to pay for its products.

    The domestic automakers’ cars are not valued as highly as either foreign or transplant automakers’ cars – therefor the labor to produce them is not as valuable. This determination is not made by management but by the consumer.

  20. Getting rid of quality assurance teams was not the mistake, its the way its done. Toyota has no quality assurance teams. In fact no Lean company does. Quality needs to be owned at the source.

  21. I agree with the LEAN comment. One of many things LEAN does is assure every worker owns the quality of his/her own work and is held accountable. My company has been incorporating LEAN and Six Sigma principles for a couple of years. I don’t think they are doing it right (everyone, from the CEO to the lowest contractor, must fully buy into it and that’s not happening) but I understand the goals. Unions are the antithesis of LEAN and union workers do NOT own and are NOT held accountable for their work and quality. This is just one of the Big 3’s problems. The pensions and healthcare of retirees, the funding of nefarious political schemes, and the lousy products are all why I refuse ever again to buy a Big 3 auto. We taxpayers are throwing obscene amounts of good money after bad.

  22. The other great thing noticed by Kaus is the unions are paying $2 per hour LESS than non-union, which means that the UAW is ripping its members off to support the bloated Union management and their lawyers. Gee, just like the teachers unions, who have achieved crappy pay for their members all the while spending millions on politicians and lobbying.

  23. Why are people indiscriminately trashing all domestic automakers? It seems that Ford is qualitatively different, and has remained in the business of making cars rather than shaking down taxpayers. Instead of “don’t buy Domestic”, shouldn’t we be saying “buy a Ford”?

  24. If value is determined by the labor involved, and not by what people are willing to pay, then,
    1. All cups of coffee are created equal, and,
    2. A house on the beach in Carmel is an even trade for an identical house next to a sewage treatment plant in Jersey City.

  25. …just rely on each department to ensure its own quality. The results where disastrous.

    That is not unlike the results of self-publishing, with no editor to catch a typo like “where” for “were”.

  26. “If value is determined by the labor involved, and not by what people are willing to pay, then,” …


    If value is determined by the labor involved then all we should have to do to solve poverty is raise the minimum wage to $100 per hour. When you try to answer why this clearly would not work under any economic system (it violates the 1st and 2nd laws of thermodynamics for one thing) the truth of this post and the lie of socialism becomes obvious. As Margaret Thatcher said, “the trouble with socialism is that eventually you run out of other peoples money.”

  27. I didn’t mean to imply that worker don’t contribute because obviously they do. Rather, I wanted to reinforce the idea that if the management can’t make a good product the workers have to reduce their own pay to make their products more competitive.

    Thanks for the clarification, I had the same thought as Brian.

  28. Why should the value of inputs be constrained by the ROI or value of production.

    You put a watt or calorie in a motor, that input’s value isn’t determined by the output of the motor.

    If the motor is the worst or the best the value of the inputs remains constant.

    I mean do you expect to pay less on the electric bill or for your transportation’s diesel fuel just beacuse your ROI sucks?

    For that to happen in reality the owner of inputs must have a real ownership stake in the decisions of which motor to use.

    Granted the owner of the motor may get a different motor or reduce the number of inputs in some other way. But the value of each input remains independent of ROI.

    Labor is an input.

  29. Mike Mahoney,

    You put a watt or calorie in a motor, that input’s value isn’t determined by the output of the motor.

    Well, yes it is. A watt put in a motor that pumps a gallon of oil has a greater value than than a watt put into a motor that pumps a gallon water. People will spend a lot of more money to put a watt into motor pumping oil than they will a motor pumping water.

    Labor is an input.

    But its not a mindless input. Workers can see the writing on the wall and alter their behavior accordingly. My argument is about how workers of poorly managed companies should respond to save their jobs. People have refused to organized precisely because they understand that the unions mindless approach to wages will destroy their competitive advantage and cost them their jobs.

  30. The House last week passed a comparable worth bill that should sail through the Senate. When that is the law of the land, there will no longer be a basis to determine the value of labor based on a market – good management or not. And you note, most on the Left have already internalized this concept and now it’s going to be imposed on all of us. This little mentioned action is probably the most ominous development from the current Congress.

  31. James Hurley,

    Lots of anti-union stuff posted here but the union people did not design the cars.

    By creating cumbersome work rules and dictating what labor saving innovations could be employed, the union abrogated to themselves the functions of management and as such took on responsibility for the outcome.

    Industrial design is not a matter of creating well engineered one off items. Its about creating products that you can mass produce given the real world constraints on the manufacturing capabilities of the company. By creating many of those restraints, the union effectively closed off many technological improvements that engineers might have made had they been more able to control how the cars got made. As such, they had to go with inferior designs that could be made under the constraints imposed by the unions.

  32. I agree with the premise that the Big 3 have been saddled by their increasingly-expensive bargaining agreements, and that the UAW has caused much of their own pain by being too greedy, but this premise – that the value of labor will be determined by the market – begs an interesting question:

    We all work to make money to live. Over the past 5 or 6 decades, many of the basic premises of work and life have begun to erode: the concept of owning your home (without a mortgage), the single-income family, and now retirement. Has the market priced us all out of a living wage? What do we do about it?

  33. Anonymous,

    … but this premise – that the value of labor will be determined by the market – begs an interesting question: Has the market priced us all out of a living wage?

    When we trade our labor, the true value of that labor is whatever others will voluntarily give us in trade. We can use force to temporally force a better deal for ourselves but in the end it comes back to the true value. We can’t escape it.

    I would point out that despite the seeming widespread perception that things are worse, people’s standards of living are higher than anytime in history. I think well manage. Most importantly, regions were people trade the freest have the highest standard of living.

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