In 2022, CEOs were paid 290 times more than the typical worker, a stark increase from 1965 when the ratio stood at 21:1 (Economic Policy Institute, 2023). This disparity raises critical questions about compensation dynamics and systemic inequities.
Why are some essential professions – cleaners, nurses and teachers – often perceived to be underpaid, despite the value that they bring? This contrasts with the common notion that CEOs spend most of their time golfing and sipping tea.
Ultimately, compensation is set not as a function of the amount of labour required nor the value created, although these can be intermediary factors. Wages are set as a function of demand and supply, but with a sprinkling of negotiation.
Supply and Demand in the labour market
Demand comes from how much businesses need a worker. Essential professions obviously have high demand. Look at France, when refuse workers went on strike. Rubbish piled up as society realised how much dependence lay on these workers.
Supply comes from the number of individuals who can replace a worker. A company will only pay the lower what they perceive is required to keep a worker in the job, or to replace that worker.
Unions act like cartels, which allows for collective bargaining. Although some may deride this as a distortion of market forces, the inherent imbalance in concentration of power between companies and workers mean that unions may be required. Besides, unions are limited in power because of how many players there are in the labour market – excessive distortions will likely be disrupted by those deviating from the union line.
Asset specificity
Asset specificity means how skilled workers are to a company’s proprietary systems. Most technology companies have their own systems that workers have to train in. Cultures, ways of working, machinery, are all company-specific assets.
Negotiation and perception
Companies have a number of tricks up their sleeves to enhance their negotiating position. One is to call their employees “family”. However, when there is a business downturn and the company has to choose between keeping excess labour and losing money, that notion of family usually dissipates. Framing workplaces as “families” obscures transactional realities to the detriment of the worker. Only when the employer is compelled to sacrifice do they often reveal the prioritisation of profits over loyalty.
Another tactic is company loyalty and passion. Some extoll passion as the reason why you should join them. People who feel they are making the world a better place have an extra incentive to cling on to a job, even if they could be making more.
The third tactic is leverage. Employers often pretend that they are doing employees a favour by providing them a job. We see this entrenched in the common norms of an interview – the interviewer sets the time at their convenience, asks questions first, and often demands referrals. When was the last time you managed to speak to the last person in the position you are seeking? Contrary to popular belief, an interview is also a chance for candidates to know the company better.
How can we increase our wage
It is a little hard to increase demand – technically, consumers drive business demand by spending, but an individual’s efforts are way too negligible to consider this.
Negotiating
Keep interviewing: the more options you have besides your current company, the more value you are signalling to both your current and prospective employers.
Develop a strong network within the company and industry: Networks are something that is difficult to replace.
Ultimately, workers are heterogenous. This means that the value that one can bring to a company differs and the best negotiating position is one that highlights your potential value.
Reducing Supply
One of my neighbours lost his job after technology outpaced his current skillset. He was actively encouraged to stick to his technical skills over the course of his work, to keep his productivity up. When the times eventually shifted, his employers let him go and replaced him with someone who had knowledge in the newer systems.
To avoid this fate, continuously update your skills and develop expertise that is both valuable and not easily replaceable.
Increase leverage
The more wealth you have and hence the ability to walk away, the better, especially when asset specificity is high. Never fall prey to lifestyle inflation, because that will impose handcuffs on you when you decide you want to make a stand for yourself.
Similar for job hunting – when you have little financial runway and need to urgently find a job, you may need to take whatever terms are given to you. If you have the ability to wait for what you know you deserve, you are likely to be better off in the long-run. That is why I advocate for students to look for employment when they are still in education.
If you can’t beat them, join them
Thomas Piketty found that capital gains have been outpacing labour. Sam Altman also argues astutely that the way to wealth is in owning something. Although entrepreneurship can be risky, there are a few ways to de-risk:
- Start Early: Youth provides resilience to failures
- Financial Cushions: Savings buffer against early-stage volatility
- Lean Operations: Minimize fixed costs to enhance adaptability
Look out for your own interests
Always remember that the only one looking out for your financial interests is yourself. Just as you would not offer to pay a restaurant more than the menu price, no employer will pay you more than what you request. If you are able to, seek to build wealth with your income, in order to escape the constraints of working within the labour market.
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