Reflecting on Adam Smith's treatment of wages, it is important to begin with a base assumption. First, it must be established that according to Adam Smith, price is determined by several factors: demand--the more demand there is for a good or service, the higher the price; supply--the more there is of a good or service, the lower the price; value--despite the supply or demand, an item that is deemed valuable or important will have a higher price. That being said, we can now progress on to wages, more specifically, what wages actually are: the price of labor.
Smith is operating under the definition of wages as the price paid for labor, labor being a service provided by the laborer.With this definition of wages, a number of conclusions can thus be drawn. First, wages, like price, are subject to fluctuations due to demand, supply, and value. Second, just like price manipulation is bad, so too is wage manipulation by both employers and laborers. These two conclusions are the focus on this reflection on Wealth of Nations.
Just like the price of objects is determined by their scarcity, the demand for them, and their perceived value, so too are wages. In places and industries where labor is scarce (supply is short), laborers are rewarded with higher wages. Consider physicians. The amount of schooling, training, interning, and practice that goes into preparing a physician to enter into the medical field diminishes the supply of doctors. Following the laws of price, physicians, therefore, will get high wages. Contrast that with most factory workers. Such positions require little training and skill, so there is a high supply of laborers and thus wages are lower. This pattern is not only true for the macro-economy, but for the micro-economy. For example, within a certain region, say Silicon Valley, the demand for highly skilled computer technician is much higher than say, Cleveland. Thus, even though there may be a large amoung of computer technicians in Cleveland in a certain year, wages for computer technicians in Cleveland will not be as high as Silicon Valley.
If wages are governed by the same principles as prices, then if price manipulations are detrimental to an area's economy, so are wage manipulations. Smith mentions two types of wage manipulations. The first is the secretive collusion between employers within a certain industry to set wage ranges within that industry. Smith seems disgusted by this action, but admits that while we may not know it, it certainly goes on. The next sort of wage manipulation is on the part of the laborers, when they strike or demonstrate. Smith is likewise against such behavior (although he recognizes such behavior as the result of desparation: "they are desperate and act with the folly and extravagence of desperate men, who must either starve or frighten their masters into an immediate compliance with their demands.")
When price is controlled for any length of time, it destroys the labor markets. Say a monopoly causes prices to rise above their natural levels. This unnatural increase in price goes against the natural demand curve for that good or service, so less people will purchase the item, which utlimately causes the monopoly to lose profit, which causes them to limit overhead spending by virtue of the labor market. What happens when "masters" and laborers enter into collusion to set prices of labor? When laborers get together to set the prices of their labor (read: Unions and "collective bargaining agreements"), a common result is what is happening in state public education pension plans and at General Motors. In both cases, the unions have demanded certain things, which the employers have agreed upon. Now, many states' pensions will be bankrupt because of these demands, and GM's failings have a lot to do with the outrageous demands of the UAW. However, the collusion to keep wages down (or even not to raise wages appropriately) creates a cash shortage that ultimately leads to a downward spiral.
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