The Key West citizen. [volume] (Key West, Fla.) 1879-current, 1946-04-03
ABILITY TO PAY

NOHSiuSl pple eiupHdSlS is DeIlS placed
upon ability to pay In tliei5aeirrent wage
negotiations. Too little attention, however,
has been given to the implications of using
this basis for wage policy. At first thought
it seems logical that earnings should de-
termine whether higher wages should be
paid. But more careful analysis reveals
the pitfalls in this concept.
If the decision in one case is higher
wages because of greater earnings, it
would seem to follow that in other cases,
where earnings are lower, wages would
be lower. 1t is difficult to visualize labor
accepting this corollary of the ability-to-
pay argument. Of course, ability toupay
cannot be equal to the total profits of a
firm. Hence; lit follows that in using this
doctrine somebody must decide what is
a fair profit up to which wage increases
can be paids However, rates of profit vary
widely insF different industries because
risks vary widely. There is no standard
that can be used to determine when profits
are excessive. The result necessarily will
be the establishment of arbitrary yard
sticks. Even if such a yardstick could be
established, it does not follow that all
profits above that rate should be used to
pay higher wages. If this were done, what
incentive would management have to in
crease efficiency? In the past the wage
Garner, the investor, the consumer and
management all have shared in such
gains and because of their sharing all of
society has benefited.
Al i
to keep profits within fair limits If profits
in any industry seem high, new firms will
be attracted into the industry. The result
ing increase in supply will push down
prices and hence reduce the average level
of profits. Relatively high rofitg=ndieate
opportunities for new firms whose entrance
into the field nrovides new employment
opportunities f0f labor. To reduce these
profits I'M order-tut raise ages would i'm
mate this gudepost and hence would af-
feet adversely the total volume Of iobs
available.
A number of other considerations
should be mentioned briefly There is no
connection between the skill of workers
and the skill of entrepreneurs. The COM
panleS with the greatest profits 90 not
necessarily have workers who are most
skillful. Also implicit in the ability-to-pay
idea is the assumption that production is
automatic, that no. matter what is done to
the producer in the way of taxes, profit
limitation, price fixing, government con-
trolls, etc. he will continue to produce. This
is a fundamental fallacy, Production is
not automatic. 1t must be induced. The
most effective incentive known is high
rate of profits.
Finally, it is important to remember
that profits are residual return No one
guarantees that they will be earned or
that they will be paid to the stockhoder
This is in sharp contrast with rents, wages
and interest, which do involve contractual
obligations. Profits represent reward for
risks undertaken in the business. If wages
are to be made dependent upon profits,
they too will fluctuate erratically and the
ability of industry to set aside reserves for
bad times will be impaired. reduction
in the number of job opportunities must
inevitably be the result