Education Changes Workers’ Collectives and Increases Wages

Two supply and demand curves: one shows unskilled labor wages at $300 and the other shows architect wages at $400

Politicians constantly repeat the mantra that education increases individuals’ wealth, and the statistics bear that out.[1] But that correlation does not establish causation. When individuals obtain an education, they put them in different worker collectives with different supply and demand curves. That shift grows their wealth.

Competition reduces prices to fill more needs.

Capitalism benefits citizens by reducing price to marginal cost. Consider two businesses selling plentiful cell phones. Suppose Target were selling a cell phone for $250, and Best Buy were selling the same phone for $210, no one would want to buy their phones at Target until Target reduced its price to $210 or lower. Suppose Target was buying its phones wholesale for $225. When it found Best Buy was selling its phones for $210, Target would tell its wholesaler that it could not make a profit unless it bought phones for $200. The wholesaler, in turn, would inform its supplier that it needs cheaper phones, and that would squeeze more efficiency out of the entire supply chain.

That competition process makes everything cheaper. By increasing efficiency, competition allows individuals to obtain more resources for filling their needs at lower costs. Under the example above, through competition, Target will sell its cell phone for $210: $40 cheaper than before capitalism. People buying cell phones at Target would use that $40 to buy more resources and to fill more needs. Thus, market capitalism and competition benefits the entire nation by providing cheaper goods.

Economists call this phenomenon “reducing price to ‘marginal cost,’” which reflects a price just slightly over the cost of producing each additional good or service. Reducing price to marginal cost works great for cell phones, cars, copper, eggs, and bananas. It works less well for human labor.

Competition reduces wages to marginal cost.

Applying the same principles to labor demonstrates that when laborers compete over wages, their wages will decrease to survival wages. David Ricardo concluded in 1821 that capitalism reduces wages to marginal cost—survival wages.[2]

Supply and demand curve chowing $300 wages for unskilled workersThus, when unskilled workers compete with each other for jobs, they reduce their wages. When workers need a job to eat and to pay rent, they undercut each other until the business can hire the worker who makes just enough to stay alive. All else equal, as long as supply exceeds demand, if a worker wants a job, she will decrease how much she will take in wages. For unskilled workers, supply usually exceeds demand significantly. As the supply of labor tightens, wages go up because fewer competitors will undercut wages.

A worker changes working collectives through education.

Education changes the worker’s collective, and that new collective has a different supply/demand curve. When a worker obtains her computer science degree, or her architecture degree, or some other degree, she changes workers’ collectives. With new skills, she no longer competes against every unskilled worker; now, she competes only against other workers with the same skills. The computer scientist only competes against other computer scientists; the architect only competes against other architects.

With education, not only the supply of specialized workers, but also the demand for them changes. People need unskilled or minimally skilled labor for digging ditches, moving furniture, and attending gas stations. Those same people do not often also need computer scientists or architects. Instead, a different group of businesses and individuals need computer scientists and architects for programming apps and designing skyscrapers.

Supply and demand curve showing architect wages of $400
Architect Collective

Economists would say that different collectives change the “demand schedule” for that type of skilled labor.[3] Even when demand decreases, restricted supply could cause wages to increase. Specialized skills does not always imply higher demand. For example, the demand for real estate agents plummeted in 2009 although those workers had specialized skills.

Thus, when workers obtain degrees and specialized skills, they change both (a) the supply of workers with those particular skills and (b) the demand for workers with those skills. Suddenly, compared to their workers’ collective, they can demand more money.

Some workers may make a bit more by working harder, but the business is always asking whether it can pay someone less and make more money. No matter how hard she works, a hardware store retail clerk will never make more than an architect. As long as the hardware store can replace her with someone with similar skills and pay her less, the hardware store has no incentive to raise wages.

Conclusion

Changing workers’ collectives demonstrates why education makes workers richer. Competition and capitalism pushes down on wages when supply exceeds demand. This explains why high schoolers can make so much more money by going to college, and why people with advanced degrees earn even more money.

[1] Francie Diep, Does More Education Make People Wealthier?, Pacific Standard (May 6, 2015), at https://psmag.com/does-more-education-make-people-wealthier-2e9bf6bbec08.

[2] On the Principles of Political Economy and Taxation 16, 219 (”The price of labour will express, clearly, the wants of the society respecting population; it will be just sufficient to support the population, which at that time the state of the funds for the maintenance of labourers, requires.” (quotations omitted)); John Kenneth Gailbraith, Affluent Society 22 (4th ed. 1984).

[3] Demand Schedule, Investopedia, at http://www.investopedia.com/terms/d/demand-schedule.asp.

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