Of the Wages of Labour

Core idea

The wage of labour is settled by a bargain between the worker and the employer — but the two sides do not bargain on equal terms. Employers are fewer, can combine more easily, and can hold out longer; workers are many, the law forbids their combinations, and most cannot last a week, much less a year, without earnings. Smith concedes the asymmetry openly: in any prolonged dispute, "the masters" win.

There is, however, a floor below which wages cannot persistently fall: the cost of subsistence plus enough to raise a family at replacement rate. If wages fall further, the labouring population shrinks, scarcity drives wages back up. There is also a ceiling set by the demand for labour — which depends not on a country's wealth but on its rate of growth in wealth. Wages are high in countries getting richer, not in countries that are already rich.

Why it matters

The topic is the most important statement in Smith of the dynamics of labour markets — and it is far more sympathetic to workers than 19th-century caricatures of Smith suggest. Three distinctions structure his argument:

Asymmetric bargaining power

Author's argument: We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate.

The market for labour is not, in Smith's view, two equal parties dickering. The asymmetry is structural and durable.

What drives wages up is growth, not wealth

A stationary economy — one that is rich but not growing — settles into the lowest sustainable wages. A growing economy — even one starting poor — bids wages up because the demand for labour keeps outpacing the supply. Smith uses three contemporary examples: North America (rapidly growing, very high wages), Great Britain (growing more slowly, moderate wages), China (stationary at a high level, very low wages), and Bengal (declining, starvation wages).

This is one of Smith's most important and underrated insights: the rate of capital accumulation, not the level of capital, is what determines whether the labouring class prospers.

Liberal wages are good for productivity

Smith rejects the contemporary view that low wages keep workers diligent. The opposite, he insists: well-fed, well-clothed, well-housed workers are more productive than starving ones. Higher wages signal a growing economy, and a growing economy is what produces the surplus from which higher wages are paid. The relationship is virtuous, not vicious.

The natural progress and the political consequence

Smith also points out a political consequence of high wages: in growing societies, labourers have leverage to demand more, and masters resist this with appeals to legislators. The law, he notes, is consistently weighted against workmen — apprenticeship laws restrict entry, settlement laws restrict mobility, and conspiracy laws forbid worker combinations while ignoring tacit combinations of employers.

Key takeaways

Mental model

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Practical application

Smith's topic is the conceptual root of the modern argument that growth, not redistribution, is the most reliable engine of broad-based wage gains. Where labour markets tighten because the economy is expanding, wages rise across the distribution; where they slacken because growth stalls, even strong redistribution faces uphill work. Modern equivalents: full-employment monetary policy as a wage-support tool; the wage gains workers captured during pandemic-era labour shortages; the political fragility of stagnant high-income economies.

A second application: wherever bargaining power is asymmetric, market outcomes will diverge from the textbook competitive ideal. Recognising this — as Smith openly did — is the modern case for labour standards, antitrust against monopsony, and worker organising rights.

Example

In the technology industry of the 2010s, demand for software engineers grew faster than the supply of skilled candidates. Wages rose sharply, signing bonuses became standard, and benefits expanded — exactly Smith's "growing economy bids up wages" pattern. The same workers, in the same nominal labour market, saw flat or falling real wages in the 2023-2024 layoff cycle when hiring contracted. Neither change tracked any shift in the workers' productivity or in the absolute wealth of the firms hiring them. It tracked the rate of change in firms' demand for labour — Smith's variable, not the textbook level-of-wealth variable.

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