This leads us to the heart of the question. It is usually assumed that an increase in wages is gained at the expense of the profits of employers. This may of course happen for short periods or in special circumstances. If wages are forced up in a particular firm, in such competition with others that it cannot raise its prices, the increase will come out of its profits. This is less likely to happen if the wage increase takes place throughout a whole industry. If the industry does not face foreign competition it may be able to increase its prices and pass the wage increase along to consumers. As these are likely to consist for the most part of workers, they will simply have their real wages reduced by having to pay more for a particular product. It is true that as a result of the increased prices, sales of that industry’s products may fall off, so that volume of profits in the industry will be reduced; but employment and total payrolls in the industry are likely to be reduced by a corresponding amount.
It is possible, no doubt, to conceive of a case in which the profits in a whole industry are reduced without any corresponding reduction in employment—a case, in other words, in which an increase in wage rates means a corresponding increase in payrolls, and in which the whole cost comes out of the industry’s profits without throwing any firm out of business. Such a result is not likely, but it is conceivable.
Suppose we take an industry like that of the railroads, for example, which cannot always pass increased wages along to the public in the form of higher rates, because government regulation will not permit it.
It is at least possible for unions to make their gains in the short run at the expense of employers and investors. The investors once had liquid funds. But they have put them, say, into the railroad business. They have turned them into rails and roadbeds, freight cars and locomotives. Once their capital might have been turned into any of a thousand forms, but today it is trapped, so to speak, in one specific form. The railway unions may force them to accept smaller returns on this capital already invested. It will pay the investors to continue running the railroad if they can earn anything at all above operating expenses, even if it is only one-tenth of one percent on their investment.
But there is an inevitable corollary of this. If the money that they have invested in railroads now yields less than money they can invest in other lines, the investors will not put a cent more into railroads. They may replace a few of the things that wear out first, to protect the small yield on their remaining capital; but in the long run they will not even bother to replace items that fall into obsolescence or decay. If capital invested at home pays them less than that invested abroad, they will invest abroad. If they cannot find sufficient return anywhere to compensate them for their risk, they will cease to invest at all.
Thus the exploitation of capital by labor can at best he merely temporary. It will quickly come to an end. It will come to an end, actually, not so much in the way indicated in our hypothetical illustration, as by the forcing of marginal firms out of business entirely, the growth of unemployment, and the forced readjustment of wages and profits to the point where the prospect of normal (or abnormal) profits leads to a resumption of employment and production. But in the meanwhile, as a result of the exploitation, unemployment and reduced production will have made everybody poorer. Even though labor for a time will have a greater relative share of the national income, the national income will fall absolutely; so that labor’s relative gains in these short periods may mean a Pyrrhic victory: they may mean that labor, too, is getting a lower total amount in terms of real purchasing power.