Economic Consequences for the Labor Market

There are several issues at stake in Smith’s discussion of how the poor law impedes perfect and natural liberty, but the first and most obvious are the economic consequences of wages of labor. The poor law distorts the market for labor in two ways. The first is that it does not allow workers to follow the market for labor. Smith describes the importance of the workers being able to freely seek out labor: “Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment” (WN I.x.a.1). Laborers naturally follow the market for labor according to the best employment because it is their interest to do so. In this way, self-interest serves to regulate this and other parts of the market.

Smith outlines the many ways that limitations on the free circulation of labor affect the market. The wages of labor and the price of goods are set in part because of the market for labor. Goods are priced according to the labor it takes to produce them. If workers are not allowed to follow the market for labor, this distorts the prices of both employment and of goods. Indeed, it was Smith who established the labor theory of value where the cost of a good is determined by either the “toil and trouble of acquiring it” or “the toil and trouble which it can save to himself” from having to acquire it (WN I.V.2). Similarly, the wages of labor are also tied to the profits and stock of any company: “The rise and fall in the profits of stock depend upon the same causes with the rise and fall in the wages of labour, the increasing or declining state of the wealth of the society; but those causes affect the one and the other very differently” (WN I.ix.1). In an earlier part of WN, Smith also notes how the price of labor is connected with many other economic concerns, but particularly the overall national wealth: “The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards” (WN I.viii.27). How the nation’s poor are paid—that is, their “liberal reward of labour,” indicates the economic health of the nation. If these wages are distorted, it affects many other components in the market process.

Second, the poor law also distorts the market for labor by causing drastically different prices for labor in neighboring parishes. Laborers are not always able to relocate to follow the highest wages, and therefore distortions in price harm the development of industry. The labor market depends on signals from the supply and demand of laborers. “It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the production of men” (WN I.viii.40). For Smith, the price of labor determines not just how much stock the company will produce, or the nation’s wealth, but also how much labor there will be in the future. On the demand side, he says that laboring families determine how many children to have based on the “liberal reward of labor” (WN I.viii.42). Further, because it either encourages or discourages child-bearing, the wages of labor are also tied to “the encouragement of industry” (WN I.viii.43). For Smith, more children equals more potential for industry to grow, as there will be laborers to support its growth. Industry can only grow if there is a large enough supply of new workers. He argues that the price of labor should only be influenced by two things: demand and the cost of the living of the workers so that they can be paid enough to raise a family (WN I.viii.15). In these ways, we can see that there are several aspects of the market that are affected by the accuracy of the price of labor. The poor law distorts many of these signals by impeding the ability of workers to travel between parishes to find work, demand for labor, and the information they have about what the best jobs are, given different prices for labor between parishes.

 
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