Of Wages and Profit in the Different Employments of Labour and Stock

Core idea

If labour and capital move freely between trades, Book I, Topic 7: Of the Natural and Market Price of Commodities's equilibrium would force the same wage and the same profit rate in every line of work — adjusted only for skill. Reality contradicts this: bricklayers earn more than weavers, lawyers more than schoolmasters, miners more than farm labourers. Why?

Smith's answer is in two parts. The first part identifies five natural reasons why wages legitimately differ between trades — what modern economists call compensating differentials. The second part identifies three unnatural causes that keep differentials larger than competition would allow — legal restrictions on labour mobility. Together they explain almost the entire structure of wage and profit dispersion.

Why it matters

This is Smith's longest topic in Book I, and the most empirically rich. It is where he tests his theoretical framework against the dense detail of 18th-century commercial life — and it is where his political critique of guild and corporation laws becomes loudest. The topic is also the conceptual ancestor of modern labour economics, particularly the literature on compensating differentials and occupational licensing.

Part 1: Five natural sources of wage variation

Smith argues that, even in a perfectly competitive labour market, wages would not be identical across trades. They would adjust to compensate for:

1. Agreeableness or disagreeableness of the work. Disagreeable, dirty, dangerous trades must pay more to attract workers. Coal miners earn more than weavers because no one would choose mining if it paid the same.
2. Difficulty and expense of learning the trade. A trade requiring long apprenticeship or expensive training must yield higher wages to repay the investment in human capital. Smith treats trained labour as a form of fixed capital deserving a return.
3. Constancy of employment. Trades with seasonal or intermittent work (bricklayers, masons) must pay more per working day to compensate for idle days.
4. Trust reposed in the workman. Trades that handle money, jewels, or matters of life and death (goldsmiths, physicians, lawyers) pay more because the trust component is part of what is being purchased.
5. Probability of success. Trades where most entrants fail (acting, law, military officership) must pay extreme winners enormously to compensate for the many who tried and failed.

Five mechanisms, all rooted in the worker's choice among alternatives. The premiums are compensations, not arbitrary privileges.

Part 1 (continued): Three sources of profit variation

A shorter version of the same analysis for capital:

1. Agreeableness of the business (less than wage variation — profit-makers care less about pleasantness than wage-earners).
2. Risk of the venture. Riskier trades must offer higher expected returns to attract capital.
3. Esteem of the trade — but Smith finds this barely matters.

He notes a key empirical observation: profit rates vary less across trades than wages do, because capital is more mobile than labour. A merchant can switch his stock from cloth to wine far more easily than a weaver can retrain as a vintner.

Part 2: Three policy obstructions

The legal apparatus of 18th-century Britain systematically distorts the natural pattern. Smith identifies three culprits:

• Apprenticeship laws — statutes requiring seven years of training (often pointless) before a person could practise certain trades. These restrict entry, raise wages in protected trades artificially, and lower wages elsewhere.
• The exclusive privileges of corporations — chartered guilds and city corporations that limited the number of practitioners, sometimes to a fixed number, regardless of demand.
• The laws of settlement — the system of poor laws that effectively bound labourers to the parish in which they were born, by denying relief to migrants. The settlement laws were Smith's most heated target; he calls them "an evident violation of natural liberty and justice."

The composite effect: wages in protected urban trades are artificially high; wages in rural and unprotected trades are artificially low; the gap between the two is far larger than free competition would produce; and the immobility prevents the natural gravitation Book I, Topic 7: Of the Natural and Market Price of Commodities described.

Why this matters morally

Smith's analysis of the settlement laws and the corporation laws is the moral high-point of Book I. He is not merely arguing for economic efficiency — he is arguing that the workman's freedom to take his labour where it can best be sold is a basic right, and that the legal regime of his England constantly violated it. The argument is structurally identical to modern critiques of occupational licensing and non-compete clauses.

Key takeaways

Mental model

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Practical application

Modern labour economics still distinguishes Smith's two sources. Compensating differentials explain why dangerous jobs pay more (oil-rig workers), why long-training jobs pay more (surgeons), why intermittent jobs pay more per working day (consultants), why trusted positions pay more (judges, fund managers), and why winner-take-all professions show extreme dispersion (entertainment, professional sport).

Legal obstructions also persist. Occupational licensing — the requirement that hairdressers, interior designers, dental hygienists, and dozens of other professions hold expensive state licences — has been shown to restrict entry, raise prices, and lower wages in adjacent unlicensed trades, exactly as Smith's apprenticeship analysis predicts. Non-compete agreements bind workers to their current employers much as settlement laws bound labourers to their parishes. The debate is two and a half centuries old and Smith's framework still organises it.

Example

Software engineering offers a clean modern demonstration of Smith's five wage-variation principles:

• Backend engineers at risky early-stage startups earn higher base + equity to compensate for risk (probability of success).
• Site reliability engineers on-call earn premiums for the disagreeableness of midnight pager duty.
• Machine-learning engineers earn premiums for the cost of training (often a PhD).
• Freelance contractors charge higher hourly rates to compensate for the inconstancy of work.
• Security engineers handling production access earn premiums tied to trust required.

The same pattern Smith mapped across 18th-century coal-mines, goldsmiths, lawyers, and bricklayers structures the wage pattern of a 21st-century technology firm. The mechanism is the worker's choice among alternatives — exactly as Smith identified.

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