Labor, capital, trade unions and state employment policy Part 1

Have you ever wondered why salaries are needed in Germany than in our country? Have you sometimes wondered what work, capital, unions and the labor office have in common? No? But that's a shame - you could come up with a lot of interesting connections. Today we will look at the relationship between labor and capital.

Labor Office logo
Labor Office logo

First, let's say what is capital? Capital in general are resources that we do not consume, but use to generate additional profit. So the capital is production machines - various lines, belts, etc., it can be a car, if we are taxi drivers, it can be money that we invest and use to generate more profit. The restaurant will need a stove. Why not.

Capital is generally what "Earns you"Capital They may or may not be your money. Your hundred-crown is your capital only if it brings you more money, profit. If you buy rolls, beer or some other consumer goods for it, then money is not your capital.

Jak capital is created?

Let's go back to your hundred-crown coin. You can do two things with it - either buy 4 beers for them or invest it for a year. You know that if you invest it, it can bring you about 10% of profit per year, so you have 110 crowns out of nothing from that hundred crowns out of a year. What are you going to do?

Either a profit of ten crowns is not enough for you, then you go and buy a beer. Capital will not be created. Or you say the ten percent that sounds tempting. Then you are you don't buy beer, you invest money and get something in a year. Capital will be created.

At the beginning of the creation of capital in general is your decision, when you choose between today's consumption (beer) and future consumption. If you decide to postpone your consumption in the future, you have taken the first step to raising capital. You have created savings. But that's not all - money that just lies will not bring you a profit.

There must be someone who takes the money and makes the investment - "produces" a capital good that is able to increase labor productivity.

Let's say a friend (let's call him Petr) comes to you, who has a small flower bed with tomatoes at home. Once in a while Petr harvests the tomatoes and sells them on the market. Petr came to you and had a great news for you: “Yeah, I saw an absolutely amazing new secateurs for gardeners over there at IBO! That would be great if I had them - I could pick tomatoes faster, sell more and still find time to sow new tomatoes so I could sell more next time! But it costs 100 crowns and I like that before the payout… "

Petr asked you for a loan of 100 crowns. First you think - hmm, what's wrong with some tomatoes? Let him wait until the paycheck, right? Petr sees that he is not reaping much success yet, so he will try to convince you: “Hal, if you lend me the money, I will rip about 150 crowns on those tomatoes. I'll give you back not a hundred, but 110 crowns, ie with ten percent interest, what do you say? "

Ten percent interest - why not, you told yourself. "You slapped each other", the money was invested, Petr bought scissors, really earned and you got 110 crowns back. Capital was created.

From the above, it is clear how much they are important savings. Savings are the basis for the creation of capital. This connection can lead us, together with other facts, to interesting contexts in real life, which we will certainly deal with in the future. But let's go back to the relationship between labor and capital.

Let's compare China and the USA ten or twenty years ago. China was (and perhaps still is) the most populous country in the world. A huge mass of people also means a huge mass of labor. Work there was (and probably still is) cheap. From the simplest point of view - there are many potential workers in China, there are more of them than potential employers. So there is a kind of work among the workers competitionwhich pushes the price of labor down.

Of course, cheap labor attracts investors. That's why investors from other countries around the world will start - where there is work more expensive - relocate production that is labor intensive, to China. The manufacturer thus reduces costs, which allows him to reduce the price of his products, which increases his competitiveness in the market.

The increasing number of incoming investors causes wage growth - the level of competition on the part of employers is increasing, there is less free labor force. However, the arrival of investors is not just about wage growth.

Let's go back to the beginning of the article - what is capital? Capital in general is resources that we do not consume, but we use them to generating additional profit. What did the investors who came to China did? They took their money and put it into building factories. Why did they do it? Because they saw it as an opportunity that would bring them profit. There was no charity behind it, no good feeling "we will give the Chinese work".

The money that investors "invested" in China became capital. So - investors not only used the "labor potential" of China, not only raised the income of the Chinese, but also brought to China the capital that was previously lacking there. They built factories with production machines, trained workers.

Before the arrival of investors, there was a minimum of capital in China - capital was scarce, so it was expensive. The work was plentiful, so it was cheap. The arrival of investors reduced the abundance of labor (therefore wages increased - there is less free labor) and at the same time reduced the rarity of capital, which thus became somewhat cheaper.

As long as labor is cheaper than capital in China, investors will come to China to build labor-intensive workplaces. At the same time, this will raise the price of labor and reduce the price of capital, until the ratio of the price of labor to the price of capital is at least equalized. At that point, labor itself will become too expensive, while capital will be relatively cheap. It is then worthwhile for investors to start building capital-intensive production in China. Those who came to China at a time of cheap labor are likely to move their production elsewhere, where labor is cheap but capital is expensive. And the exact opposite effect begins - when it becomes cheaper working strength and makes capital more expensive.

In the USA, the situation is (or was) the opposite - labor was expensive, capital was cheap. That's why we have Silicon Valey in the USA, which is de facto the navel of the IT world. After all - the largest investors in China include American companies such as Intel, IBM, Microsoft, Google and others.

The German problem - human capital

At the turn of the 50s and 60s, some economists tried to challenge this theory - pointing to West Germany, which was devastated after the war: destroyed factories, destroyed houses, land - at first glance - without capital. It had "only its inhabitants." Those economists who tried to question the relationship between labor and capital pointed out that, according to theory, they would work in the GDR should be cheapwhile capital should be more expensive. Logically, the NSR should focus on labor-intensive, but not capital-intensive manufacturing, for example, on agriculture. However, this did not happen - after the war, the GDR developed very quickly in capital-intensive industries, such as the automotive industry. As?

One very important type of capital was omitted (in fact, I don't know theoretically yet): human capital. West Germany had "only its inhabitants", but they were educated and experienced. Education is capital. Why are we educating? In order to have a higher salary in the future, we are postponing current consumption (sacrificing the salary of work we could go to instead of school) due to the vision of higher profits in the future. A generally highly educated society is a society with abundance human capital, thus, it can be expected that a country with high education will focus on capital-intensive disciplines, science and more.

Next time, we will add the influence of trade unions and the state to our consideration.


  1. Luke, great, brilliant, if only sometimes the spelling did not falter 🙂 How about the coincidence of the stimulus with the judgment?
    … Money was invested x money was invested

Comments are off.