In today's NYT, Bob Frank argues that since private markets compress pay differences relative to productivity differences, libertarians should accept government redistribution of wealth/income.
Here, I'll just concentrate on the bad economics.
Frank's example of where pay doesn't follow productivity is carpenters in a framing crew. He says:
The most productive carpenter in a framing crew, for example, might produce twice as much as his least productive colleague, but is rarely paid even 30 percent more.
This is pretty nuts in a number of dimensions.
First, where do these numbers come from? The weasel words "might" and "rarely" are there to cover his ass, but this is just made up out of whole cloth.
Second, a framing crew produces a framed house. It is team production. Marginal products are notoriously difficult to measure in this context and there is a lot of "economic theory" about this issue. It would be almost impossible to verify that one framer produced "twice as much" as another inside of a single crew.
Third, just widen the issue from carpenters on a framing crew to carpenters in general and his point totally fails. The least skilled work on framing crews. Higher skilled are the finish carpenters who do make a lot more money (easily more than twice as much). The highest skilled are artisans turning out custom furniture pieces and they in turn make a lot more money than do finish carpenters (again, easily more than twice as much).
I am not going to put quantitative numbers on these classes (with weasel words to give me an escape valve), but I am confident that, over the trade of carpentry in general, variations in earnings are extremely tied to variations in skill and these variations are quite large.
Frank then claims that the two highest paid workers in an enterprise rarely earn more than the three lowest paid.
Man, I guess CEO pay is really not an issue in this country after all.
Also in Frank's own industry, higher education, this is certainly not the case.
In econ departments and b-schools at least, the two highest paid full professors easily earn more than the three lowest paid assistants.
And of course, if you take the unit of observation to be the university, the gap between highest and lowest "employee" is very very large. OU's president makes over $250K and some staff make less than $25K.
There are a number of fields where pay is close to linearly related to productivity. Piecework jobs in factories and sales jobs on commission are two obvious examples.
Finally, there is a whole literature about the exact opposite case than the one Frank claims to be telling, where there is increasing returns to talent.
Writing, acting, making music, professional sports, and several other fields of endeavor all exhibit this trait.
10 comments:
Aren't many carpenters either union members or forced to pay union wages anyway thanks to Davis-Bacon?
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Third, just widen the issue from carpenters on a framing crew to carpenters in general and his point totally fails. The least skilled work on framing crews. Higher skilled are the finish carpenters who do make a lot more money (easily more than twice as much). The highest skilled are artisans turning out custom furniture pieces and they in turn make a lot more money than do finish carpenters (again, easily more than twice as much).
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So you're saying that the average salary structure looks something like this:
Framing crew: 25k
Finish crew: 62k
Cabinet maker: 156k
(I'm assuming that 'easily more than twice as much' equals 2.5)
If that were the case I know quite a few white collar professionals who would love to be cabinet makers.
But I don't see that happening, which leads me to believe that your numbers don't reflect compensation structures in the real world.
The numbers in my head when I wrote the post were 25-30 / 50-60 / 100-120, and no, I don't think they are badly off
The gap between framer and finish may be larger (in percent) than the that between finish and artisan, but apart from the exact numerical details, the skill- pay variation in carpentry is way way way greater than Frank implies and the point that to see it you can't just look inside a single subtype to find it.
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The numbers in my head when I wrote the post were 25-30 / 50-60 / 100-120, and no, I don't think they are badly off
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I googled for cabinet/custom furniture makers' salaries and failed to find anything over 70k.
Not that anecdotal evidence is dispositive, but I also know someone who enjoyed making furniture professionally but left it for a white collar job @60k/year.
My high school shop teacher also made money on the side making custom furniture. If it paid anywhere near 100k he would have quit teaching in a heartbeat.
You are all missing the most fundamental error. The economic theory that claims a workers wage should be equal to the what he produces is called marxism. In any economic model that allows profits it must be less. Further there are few remaining credible economic theories that try to tie the price of anything directly to something concrete. The price of anything is what a buyer and seller agree to, and this applies to carpenters. Having actually employed people, I can assure you that many factors effect wages beyond productivity. Available qualified workers at the time of employment, the need for the employee, The rate they asked. With small variation the wage negotiated at hire caries through, More productive employees tend to get higher bonuses and raises, but it can take a long time to correct for disparities. Nor does this apply solely to hiring. In many jobs highly productive employees are billed out at the same rates as less productive employees.
At the same time job security is far higher for productive employees. Outside union controlled occupations, determining who stays and who goes when things get tough is a function of value. highly productive employees with low wages are recession proof. Carpentry in particular is seasonal. Those offering the contractor the most value will have work through the winter or bad weather.
Wages like all prices are complex, and somewhat arbitrary. Their direct correlation to any theory of value is weak at best.
@dhlii, If the value of the marginal product of the workers you hired wasn't being equated to the wage you had to pay, then you weren't minimizing your costs of production. I'm guessing that you're no longer in charge of hiring workers.
Also, what in the name of Sherwin Rosen is Bob Frank talking about? Why does writing for the NYT seem to turn good economists into blithering idiots?
Based on my experience, most framing crew members make $8-10 /hr (~$16K-$20K/yr) cash.
I do believe, however, that wages are compressed for 98% of employees in corporate America. But, this is due to the plethora of labor laws that strangle any hope of objectively differentiating employees.
Angus touched a raw nerve: "Man, I guess CEO pay is really not an issue in this country after all."
Of course it's not. Unless you happen to be in the market for a CEO, only envy causes any interest in their salaries. Their pay is "not my money." The hundreds of billions wasted by Bush, Obama, et al, by contrast, is my money. Their "economic theory" would need two promotions to reach the voodoo level.
I know the answer to this question: "Why does writing for the NYT seem to turn good economists into blithering idiots?"
Writing for NYT is for and about politics. The conclusion is predetermined -- all logic and facts must be bent to meet that goal.
Here's a blog by a furniture builder who's been in business 20+ years. It doesn't sound like he's pulling in $100-120k. In fact, he's on the edge of going bankrupt.
http://boss.blogs.nytimes.com/author/paul-downs/
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