Thoughts on worker pay

Some workers get paid a lot more than others. A few CEOs make tens of millions of dollars per year. Other workers get paid $5.15/hour, and some argue that this legal minimum is too high.

There are several significant numbers here:

V is what a worker gets paid

W is what a worker contributes to his employer in the job he's currently in.

X is what a worker contributes to the economy in the job he's currently in.

Y is what a worker could contribute to an employer if his job was perfectly matched to his talents.

Z is what a worker could contribute to the economy if his job was perfectly matched to his talents.

In a perfectly free market for labor, every worker would get paid slightly less than Y. (Slightly less because we expect the employer to make a profit.)

In a world better than a free market where there were certain government regulations in place to prevent externalities and rent seeking behavior, every worker would get paid slightly less than Z. This model maximizes the nation's output.

In the real world, V is only very modestly correlated with W. Two workers might be at the very same company and contributing the exact same amount to their employer, yet they get paid vastly different salaries.

What's the difference between W and X (or between Y and Z)? One example is a salesman. He contributes to his employer by selling his employer's products, but he's not contributing to the economy at all because his job is a zero sum rent seeking job. Or even worse, if his employer's products are worse than competing products, every sale he rings up actually has a negative impact on the economy.

Why are worker salaries so vastly out of sync with Y? Here are a few reasons:

(1) Lack of information. Workers don't know what they are truly worth because they lack information about the labor market. Most people don't even know what their coworkers are getting paid! At the same time, employers don't even know how much their employees contribute relative to other employees and they have even less of an idea how much potential employees might contribute if hired.

(2) Unequal bargaining power. I've written before about unequal bargaining power. This almost always benefits the employer but in rare cases it benefits the worker.

(3) Management problems of large organizations. A manager makes decisions to benefit himself and not his employer's stockholders. A manager may hire a pretty woman rather than a man or an ugly woman who would do the job better. He may purposely hire someone not so good in order to make himself look better. My post about whether companies really want to hire the best employees is relevant here.

Comments

[Austrian]

"In the real world, V is only very modestly correlated with W. Two workers might be at the very same company and contributing the exact same mount to their employer, yet they get paid vastly different salaries."

There are many factors hard to quantify, such as ability to work with others, personality, etc, that make any claim as to "contributing the exact same amount" impossible to measure.

I get the feeling all of this W,X,Y nonsense is in preparation for your argument why government should interfere in labor wage agreements between consenting adults, and why the minimum wage should be increased. Let's hear it!

[Half Sigma]

Austrian, I agree with you that it's hard to near impossible to measure exactly how much people contribute, that's I wrote in my post under point (1).

And I also said that government regulations could move the economy from model W/Y to X/Z. On the other hand I'm the first person to tell you that the net effect of the huge number of government regulations we have today is to move things in the opposite direction: creating rewards for activities which don't benefit the economy.

[The Superfluous Man]

It seems that #1 exacerbates no.2 and 3, Ie, the elite worker may have little bargaining power if not aware of his own worth, and the manager hiring bimbos does not know how much he's sacrificing.

"Or even worse, if his employer's products are worse than competing products, every sale he rings up actually has a negative impact on the economy."
That assumes that a product will be bought. If Oracle's software is better than Peoplesoft's, but I won't buy Oracle because it's costlier, it isn't necessarily a negative effect.

All jobs whose W is less than the minimum wage would be eliminated by such a wage control. Even if you deem this amount minimal, the optimal (whatever your calculation) minimum wage will not be set, but rather the politically possible one - out of the technocrat's hands, into the politician's.

[TGGP]

Salesmen have a rent-seeking occupation? Selling a product "inferior" to its competitors is negative sum? What economist gave you those kinds of ideas?

[bbartlog]

You're kind of skirting into 'intrinsic value' territory here. Also, the difference between V and W is not there simply because the business has to make a profit; in fact (because capital expects a certain return and will otherwise not invest) I would argue that there will be profits even if V=W. There is (in cases pf filled jobs) a natural gap between the minimum someone is willing to work for and the most an employer is willing to pay them, and since the actual wage is between these numbers, some portion becomes consumer (employer) surplus and the other part producer (worker) surplus. In my opinion the only benefit (if you want to call it that) of the minimum wage is that in many cases it transfers some of this surplus from employer to employee. In cases where the employer is assumed to have a lesser utility per dollar from money (by virtue of being wealthier) you can argue that overall human welfare increases. Of course, as has already been covered at Marginal Revolution and Cafe Hayek, there are a half dozen distortions and balancing effects that end up ruining the overall benefit. And it's a capricious sort of tax to start with; if you want to transfer money from rich to poor, why not just do it explicitly?

[Scott]

What happens if a truly unskilled worker's Z, that is what he "could contribute to the economy if his job was perfectly matched to his talents", was actually below the minimum wage?

Wouldn't it be better for this person to contribute say $4 an hour of productivity to the economy and receive government benefits to top up the rest rather than not being able to find a job in the first place because of minimum wage legislation and thereby have to receive a much higher level of government benefits? Wouldn't contributed even $4 an hour to national output be better than contributing nothing?

[Jody]

I'm with TGGP - salesmen provide a service to both customer and employer.

[michael vassar]

I'm against TGGP and Jody, at least with respect to salesmen who leave their business establishment. If salesmen were providing a service to customers the customers would be willing to pay for their services. That almost NEVER happens. Much more frequently customers are willing to pay to avoid them. OTOH, customers DO pay, with higher prices, for the services of salesmen in high-end business establishments. That's a lot of what someone pays for at Gucci or the like, and they are paying for a valuable service.

[michael vassar]

Lets not forget that employers also often hire many workers to do nominally the same job for the same wage when those workers do wildly different amounts of productive work.

bbartlog: Half-sigma HAS advocated explicit distribution of wealth from rich to poor. That's obviously a better solution than this one is, but are people ONLY permitted to advocate the best of all possible improvements?

Scott: I find it difficult to believe that there are many workers who can contribute $4/hr to national output but cannot contribute $7/hr, at lest in the contemporary US after the costs imposed by even "free" workers on their employers in terms of security etc are taken into account. What examples would you suggest?
In a different society very low end domestic service might genuinely produce value but less than $7/hr worth of value, but in our society we generally don't trust anyone incapable of producing much more than $7/hr worth of goods/services in our homes. I certainly wouldn't.

[Sco]

Michael Vassar,

Salesman don't provide value to customers because customers don't pay them directly? Hogwash. Salaries of salesmen are built into the cost of products customers purchase and therefore are paying them. Additionally, can you honestly say in your entire life you've never walked into a store and had a salesman help you by helping you find a product or explaining what it does? If you have, guess what, they've added value to you by saving you time or helping you understand a product.

Also, I never said there were "many" workers who only contribute $4/hour, I said what if there were 1. As for examples, none come to mind, mostly because with a minimum wage above $5 an hour not many businesses would stay in business if they paid an employee $5 an hour for productivity equivalent to only $4 an hour.

As for bbartlog's post, isn't the point of policy discussions to figure out which in fact is the best improvement and implement that? Sure we can discuss how I can use a hammer to put in a screw, but if a screwdriver does a much better job why not use that. If the point of a minimum wage is to serve as a redistribution tool, there are better options.

[michael vassar]

Sco: Can you read? (or type? Sco for Scott?) Try again and see if you can follow my post before responding this time. I explicitly said that "OTOH, customers DO pay, with higher prices, for the services of salesmen in high-end business establishments. That's a lot of what someone pays for at Gucci or the like, and they are paying for a valuable service."

The point in a policy discussion is NOT just to determine what would be best. If we were doing that it would be very easy. The ideal policy is anarcho-capitalism among totally generous, non-violent, and hard working citizens who only use money as markers of labor in order to solve information aggregation problems. Since we can't convince people to become saints we don't advocate that as policy. We also probably can't convince people to vote for whatever policy maximizes aggregate utility, so when discussing policy it is appropriate to discuss any policy proposals that constitute improvements upon the current situation unless those improvements would be more difficult to implement than dominating options.

[Scott]

Vasser: First of all, I'm not sure why my name got shortened to Sco, but before you call me out on my typing ability you may want to check the numerous typos in your comments.

Secondly, yes I can read, though when someone makes statements like "[i]f salesmen were providing a service to customers the customers would be willing to pay for their services" and "OTOH, customers DO pay, with higher prices" in the same comment it's hard to understand exactly what you believe. As well, I still fail to see how your "OTOH" only applies to high end establishments. Surely salesman are useful in all levels of business otherwise I'd expect them to be phased out for their "rent seeking" activities.

[cpurick]

Total drivel.

Your use of made-up values -- "what a worker contributes to his employer in the job he's currently in," "what a worker contributes to the economy in the job he's currently in," etc., reveals your complete ignorance about economic theory.

Until you can put this claptrap in terms of the curves and values described by actual economists, it's clear you have no actual economic argument for your leftist garbage.