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9. Production: Particular Factor Prices and... > 2. Land, Labor, and Rent

F. A Note on Overt and Total Wage Rates

It is “total wage rates” that are determined on the market. They tend to be equalized on the market and to be set at the DMVP of the worker. Total wage rates are the money paid out by the employer for labor services. They do not necessarily correspond to the “take-home pay” of the worker. The latter may be called the “overt wage rates.” Thus, suppose that there are two competing employers bidding for the same type of labor. One employer, Mr. A, pays out a certain amount of money, not in direct wages, but in pension funds or other “welfare” benefits. These benefits, it must be realized, will not be added as a gift from the employer to the workers. They will not be additions to the total wage rates. Overt wage rates paid out by Mr. A will instead be correspondingly lower than those paid out by his rival, Mr. B, who does not have to spend on the “welfare” benefits.

To the employer, in other words, it makes no difference in what form workers cost him money, whether in “take-home pay” or in welfare benefits. But he cannot pay more than the worker's DMVP; i.e., the worker's total wage income is set by this amount. The worker, in effect, chooses in what form he would like his pay and in what proportion of net wage rates to “welfare” benefits. Part of these benefits is money that the employer might spend to provide particularly pleasant or plush working conditions for all or some of his employees. This cost is part of the total and is deducted from the overt wage rates of the employee.

The institutional manner of paying wage rates is a matter of complete indifference to our analysis. Thus, while “piece rates” or “time rates” may be more convenient in any given industry, they do not differ in essentials; both are wage rates paid for a certain amount of work. With time rates, the employer has in mind a standard of performance which he expects from a worker, and he pays according to that rate.21

  • 21. For a discussion of these problems, see Mises, Human Action, pp. 598– 600.