Almost everyone agrees that workers should receive a fair wage. The difficulty begins when employers, employees and policymakers try to define what “fair” actually means.
Should wages reflect how much a worker produces? Should they be enough to support a family? Should companies pay more simply because their profits have increased? Or should compensation depend mainly on supply and demand in the labor market?
Economist Jesus Felipe explores these questions in his study, Could Pope Leo XIV and Karl Marx See Eye to Eye? Comments and Questions on MAGNIFICA HUMANITAS. Felipe, Distinguished Professor at the Carlos L. Tiu School of Economics of De La Salle University, wrote the paper as a critical examination of Pope Leo XIV’s encyclical Magnifica Humanitas, particularly its discussion of artificial intelligence, labor, wages, profits and inequality.
One of the ideas Felipe examines is the Catholic social teaching that wages should take into account more than worker performance.
The encyclical recalls the argument of Quadragesimo Anno that wages should be proportionate “not only to performance, but also to the needs of workers and their families.”
It is an intuitively appealing principle. A worker should earn enough to live with dignity and support a household. But Felipe argues that once the idea is translated into actual wage-setting, the economics becomes far more complicated.
“How do we determine whether a wage rate is fair or not?” he asks.
What companies can afford to pay
In standard economics, wages are closely connected to productivity.
Felipe explains that a profit-maximizing company will generally continue hiring workers as long as the additional revenue generated by another employee is at least as large as the cost of employing that worker.
In simple terms, a business cannot sustainably pay employees far more than the value their work creates.
“Wages have to be linked to some measure of productivity for the survival of the firm,” Felipe writes.
This is why debates about minimum wages can become difficult. Higher pay may improve workers’ living standards, but businesses still have to generate enough revenue to cover higher labor costs and remain profitable.
Felipe also raises a practical problem with the idea that wages should reflect family needs. If two employees perform the same work with similar productivity but one supports a larger family, should that worker receive a higher salary?
“Do we ask companies to pay more to those workers with larger families?” he asks.
The question exposes the tension between two different concepts of fairness. One is based on the economic value of work. The other is based on what workers need to maintain an acceptable standard of living. Neither is easy to apply in isolation.
Productivity does not guarantee higher pay
The conventional argument suggests that workers should benefit as they become more productive. When an employee produces more value per hour, competition among employers should eventually push compensation higher.
But Felipe stresses that this relationship does not always work smoothly.
“Yet productivity growth does not always lead to wage growth,” he writes.
The reason is that wages are influenced not only by productivity but also by bargaining power.
If workers have many employment options, companies may have to increase salaries to retain them. If a small number of firms dominate an industry, or workers have difficulty moving between employers, companies may be able to capture more of the gains from productivity themselves.
“When a small number of dominant firms capture the gains, or workers cannot credibly move from one employer to another, higher productivity may raise profits without generating proportional wage increases,” Felipe writes.
This helps explain why employees do not always feel the benefits of economic growth or improvements in corporate performance.
A company can become more productive, expand margins and generate higher profits while wages rise much more slowly. From an accounting perspective, the business may be performing exceptionally well. From the worker’s perspective, however, the gains may appear unevenly distributed.
Fair wages are also about bargaining power
Felipe’s discussion ultimately moves beyond the simple idea that wages equal productivity.
He notes that researchers have documented a declining labor share of national income in several advanced economies, while a greater portion has accrued to owners of capital.
This does not mean productivity is irrelevant. A company still needs employees to generate sufficient economic value if wages are to rise sustainably. But productivity alone does not determine how the resulting income is divided between workers and owners.
Competition, labor mobility, bargaining power and institutions also influence the outcome.
That makes the question of a fair wage more difficult than either side of the debate sometimes acknowledges.
Employers cannot simply ignore productivity and profitability when they set compensation. A business that consistently pays more than it can economically sustain will eventually face problems.
At the same time, workers cannot assume that greater productivity will automatically produce proportionately higher salaries. If bargaining power is weak, much of the additional value can flow instead to profits and owners of capital.
Felipe’s study therefore turns a seemingly simple moral principle into a more complicated economic question.
A fair wage must somehow reconcile what workers need, what they produce and what firms can sustainably pay. The harder question is how the gains from rising productivity should be divided once a business becomes more successful.
This is where the debate over wages stops being only about economics and becomes a debate about how economic power is shared.
