Markets, salaries and profits

Marx claimed that profit is what compresses salaries. In free markets, profits and salaries are to a large degree unrelated, not entirely because in an economy all are interrelated. Supply and demand compresses salaries. We do not have just one market but several markets. In those markets, prices are determined separately.

Let’s take something simple to produce, bottled olive oil. Olives, plastic bottles, caps and labels are used to make an olive oil bottle. The prices for all those are determined in different markets and may fluctuate from time to time. The major cost components are olives and labor. Machinery is bought only once and there will be many years before new is obtained. Bottled olive oil is a different market than olives market but in substitute and supplementary goods, markets are closely interrelated. They are not related though with labor market.

If we add up all the costs, we get total cost. This includes, labor, raw material, taxes, transportation etc. This total cost is determined in many different markets that are different than bottled olive oil market. Total cost can be much higher, a little higher, equal, a little lower or much lower than bottled olive oil price. If it is higher it is as unprofitable. If it is equal, there is zero return on investment and although there is no loss, it is not worth it. This is a static view but it helps to understand it better. In reality, profits fluctuate overtime and the return could be negative (loss) at some points, especially the beginning of the business venture. Also, free market without price fixing was assumed.

That is how huge profits are made. If entrepreneurs can find markets, where the cost of producing something is much lower than the price it can sell for, they get big profit margins. This happens more often in new industries or new products because there is not enough supply and although demand may be not at its peak, products or services may sell for high prices. Others slowly realize that there are big profit margins in that market and get in, so eventually the profit margins come down.

So, profits are only remotely related to salaries. Supply and demand determines the wages. There are many unskilled laborers so in that market there is a lot of supply and that brings payment down. Now if a minimum wage is set, it will create unemployment because there will be excess supply as is the first diagram . What effect does immigration have on labor markets?

In the labor market the sellers are the workers, defining it as people that are employed, not just factory or farm workers. When there are open vacancies in an economy, we have a workers’ market which means that the workers have the advantage. There is overdemand for workers. This is the same as a sellers’ market. If there are more workers than jobs, we have an employers’ market and the employers have the advantage. This is similar to a buyers’ market.

The economy will stabilize in a position where there is no overdemand or oversupply but an equilibrium. In the first case of workers’ market, the salaries will go up and in the second case of employers’ market, the salaries will go down. The impact of immigration has to do with whether we have a workers’ market, an employers’ market or an equilibrium.

If we have an employers’ market, bringing in new workers will make things even worse for domestic workers. In the case of equilibrium, it will create an oversupply of workers and an employers’ market. In both cases immigrants will take the jobs from locals since they get paid less. The only case which can be argued that it is beneficial for the economy as a whole, is in workers’ market where there are job vacancies.

From the employer’s perspective, it could be beneficial to bring in workers at any of the three situations. From the domestic worker’s perspective, it could be beneficial at any of these three situations to deport working immigrants. More workers bring salaries down and less workers bring salaries up. Immigrants will create new jobs but after some time and it will be a fraction of the jobs they have taken.