In 2021, CEOs were paid 344 times more than the typical worker. Is this a policy failure?
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.
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. The value that others place on what you offer is the value of the demand for your labour.
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. Because of this, any occupation with low barriers to entry will have low wages, even if they provide outsized value.
Unions act like cartels, which allows for collective bargaining. Although some may deride unionisation as a distortion of market forces, I find it strange that capital is allowed to accumulate and aggregate, while labour is deemed a distortion. A true free market would allow any organisation, whether in capital or labour. In fact, there should only be restrictions on unions in antitrust – much as companies are barred from growing too much and abusing their monopolistic position, unions should be allowed to grow if there are multiple unions each competing for membership.
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 position for their own benefit. While capital can be controlled by a single individual, labour cannot (because slavery is rightfully banned). As such, it is much harder for a union to direct concerted labour action compared to a company’s direction of capital allocation.
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. A person usually sees pay rises with seniority in a company, partially to pacify them with the notion of progress and attract new talent, as well as to retain them because their knowledge of the company’s internal resources is valuable. That said, the former is usually tenuous and the latter is the key driver for pay rises – if a company can replace an experienced worker with a less experienced one for the same output at lower wages, most would do so.
Negotiation and perception
Companies have a number of tricks up their sleeves to enhance their negotiating position. One is to call their employees “family”. Most families do not operate on a transactional basis. 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.
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. Unfortunately, throughout most of history, companies have been able to hold the upper hand. While the Great Resignation was hailed as an awakening of worker power as people started quitting, it lasted slightly less than three years before a recession set workers back again. Realise that a job interview somehow always starts with the company asking questions first, often leaving a cursory five minutes for candidates to ask questions.
Contrary to popular belief, an interview is also a chance for candidates to know the company better. Some boomers posit that candidates should be “hungry” and swallow what they are told. That is not ideal – 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.
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 leans on the value you bring to the employer versus a potential replacement.
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 even when you have a job: the more options you have besides your current company, the more value you are signalling to your employers. If they don’t want to match it, leave.
Develop a strong network within the company: Networks are something that is difficult to replace, which increases your intrinsic value to the company.
Increasing your replacement cost
One of my neighbours lost his job after technology outpaced his current skillset. He used COBOL, which he had been using at this employer for the past twenty years. To keep his productivity up, he was encouraged to continue using COBOL, because the employer’s systems operated using COBOL. As such, he neglected newer developments and software – at the behest of his employer, mind you. When the times eventually shifted and there was a revamp in systems, his employers let him go and replaced him with someone who had knowledge in the newer systems.
Never take your job as a given. Your employer would drop you in a heartbeat if necessary. Stay ahead of the market – remember that the skills you need to possess at every point are those demanded by the market, not the skills demanded by one employer.
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 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, so that you have the cushion of time before life’s commitments kick in. Failure would also mean that at worst, you change your life commitments (such as having kids). It is a lot harder to reverse some commitments, if not downright impossible
- Save to create a financial cushion. Freedom is the true luxury, not some new bag or holiday. Don’t be afraid to spend – but do be aware that your spending affects the level of freedom you have in the future, so do weigh and discount your utilities appropriately!
- Keep start-up expenses low. There is no need to spend a ton validating your idea. Use no-code for MVPs, free hosting sites and cheap domain names instead of splurging on an idea that might be inherently unviable.
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