Economic Falacies: Pay Equals Importance

The “Pay Equals Importance” fallacy maintains that the wages and salaries people are paid should be commensurate with the importance of their work.

People frequently lament that schoolteachers make so little money, but a famous basketball player like Kobe Bryant makes 30 million dollars annually (including endorsements, etc.). After all, teaching our children is far more important than playing a game. I don’t think there is any question in most people’s minds that teaching children is more important. The trouble comes in assuming that remuneration is based on the importance of the work done.

Think about another realm of economic activity. How important to you is air? We would agree that it is essential. More than a minute or two without air, and we die. But how much will your next breath cost? Nothing. That doesn’t mean it isn’t important.

Conversely, how important is a diamond? Sure, we might all like to have a diamond, but is it important to have one? Will we die without it? No. Yet we spend thousands of dollars on a diamond. Does that mean a diamond is more important than air? Not at all.

The issue we are dealing with here is what economists call marginality. There is no intrinsic price for a breath of air or a diamond. Price is determined by the supply relative to demand. What will it cost to secure the next unit on top of the previous units already consumed? (Or what is the cost of my purchase at the margin (marginality) of what has already been purchased?) Air is so plentiful that no cost is attached to my next breath. Yet to secure the next diamond requires a major investment of time, capital, labor, and other resources to extract it from the earth. Alternatively, I can make offers for other diamonds already in circulation. Either way, the cost of the next diamond at the margin is very high.

Returning to our schoolteacher versus Kobe Bryant example, what is the economic value of the next teacher we might wish to hire versus the economic value of the next Kobe Bryant we might want to hire? The number of people with an aptitude for teaching is many thousands. The number of people who can play basketball at Kobe Bryant’s level might be counted on one hand. Therefore, since teachers are much more plentiful, the next teacher will command a much lower salary than will our scarce star athlete. This says absolutely nothing about the importance of the work they do.

I’m not making any judgments here about placing such a high demand on basketball talent any more than I am about valuing highly compressed lumps of carbon (diamonds), the ability to place paint exquisitely on a canvas, or being able to play a character in a movie. The central issue is that the societal importance of the task is not the determining factor of economic value. Supply relative to demand is.

[Index]

Comments

[Peter]

Well put.

In addition -- recognizing this does not mean we do not want people to earn as much as possible. We should want that! However, I would argue that the best means to attain this would be by helping people gain the skills needed to access higher paying jobs. Rather than up wages by legislative fiat, a better approach would be to expand access to the training needed to gain higher demand skills. I can imagine this as something that government has a strong role in providing.

[Ruud Vermeij]

Hey Michael,

Back off a bit! I am studying to become a teacher :-)

[Michael W. Kruse]

Peter, I think in addition to helping people be better equipped is the need for people to discern their call. By "call" I don't mean a call to specific occupation but rather to a way of being in doing in the world that is unique to our individual aptitudes, experiences, and passions. We are all called but for some reason we only expect pastors to discern it in there lives. Discerning call makes equipping so much easier.

[Michael W. Kruse]

LOL, Ruud.

My dad left a corporate scientific research postion to be a college professor from the time I was age 9 to 19. Half cut pay in standard of living. I feel your pain. :)

[T]

Michael,

First let me say thank you for blogging about these things. Keep it up.

In response to this post: I agree, but . . .

It's probably worth clarifying what you hinted at towards the end: Within the demand part of the equation (which is not, as you said very well, the only factor) are lots and lots of decisions that do reflect what the members of that economy deem important (what they're willing to pay for with their limited dollars). We do collectively value (as important) being able to watch the very few people who can play basketball at Kobe's level (or slightly under it) actually play it. I'd be curious what the total amount spent on that product within the US is. I would guess, though, that the total spent by the US economy on putting out the professional basketball product isn't as much as what's spent nationally on education for minors, but I don't know. Also, quality in education requires lots and lots of teachers (quality generally goes up with more teachers per student) whereas the quality of professional basketball games requires an extremely limited number of acceptable players and teams. That dynamic alone makes comparing average teacher salary to average NBA player salary completely irrelevant to the "importance" issue.

It would be better, if we wanted to see what we collectively value as important, to compare the total amount spent on the pro basketball industry with the total spent on the education of minors. That, to me, would actually say a lot about what we as a collective society deem more important, more worthy of our dollars, maybe with disturbing (or encouraging) clarity.

[Andy]

Hey Michael,
I just had a couple of quick questions to clarify your thoughts:

(1) Would you agree that wages/salaries is an incentive for labour?

(2)Would you agree that the "market's" demand isn't always wise? can be manipulated? and perhaps should be regulated?

and finally

(3) in light of questions 1 & 2, what are your views on minimum wage? And finally in light of your teachers analogy what do you think about the minimum wage some states like Texas and some European countries have implemented for Teachers?

Ok maybe more than a few :)

[Michael W. Kruse]

Thanks, T, for fleshing things out more.

[Michael W. Kruse]

Andy,

“(1) Would you agree that wages/salaries is an incentive for labour?”

I think that certainly is a part of it. Higher wages usually means a developing shortage of sufficiently productive workers. Higher wages motivates more people to develop the skills necessary to do the work.

“(2)Would you agree that the "market's" demand isn't always wise? can be manipulated? and perhaps should be regulated?”

I don’t know that I would use the word manipulated. I’d need to hear more about that. All markets are imperfect and there are often externalities. Usually these are so relatively insignificant that they are not worth trifling with. But Some times there is a need for government intervention. I can’t give a formulaic response.

However, I would ask in return, who will regulate the regulators? If the concern is society inadequately valuing education, isn’t this the same society electing the lawmakers who are doing the regulating? I’m not saying there isn’t a role for government but why is government regulation our default solution rather looking to civic society doing its job at instilling virtue in citizens so that we get better economic decision making?

I believe we were made for freedom and that includes economic freedom. But as Christians our freedom is not for licentious, but rather freedom to choose that which is just and compassionate, and to call others into to similar living. Freedom in sinful world we always entail abuse and civil society needs some limits on excessive abuse, but people freely choosing the good is always a better option than the state compelling obedience when we can achieve it.

“(3) in light of questions 1 & 2, what are your views on minimum wage? And finally in light of your teachers analogy what do you think about the minimum wage some states like Texas and some European countries have implemented for Teachers?”

I’m not a big fan of the minimum wage as poverty fighting technique. Minimum wage is a very mixed bag with uneven consequences. The corollary reality of the min. wage is that it makes it more expensive for employers to take risks on unskilled workers. It gives employers an incentive to find alternatives, like using fewer but more skilled workers, automation, outsourcing, of even closing a business. As the min wage approaches and passes what the market min tends to be, it actually destroys jobs and hurts the poor.

Some low income folks will benefit from the wage but only 15% of minimum wage earners are in poverty households. Half live in households that have more than $40,000 in income. Keep in mind that a great many min. wage earners are teenagers earning extra spending money in their first jobs. I think min wage is damaging to those people at the margins with no skills. It effectively moves the first rung on the economic ladder one step higher out of their reach. I much prefer cash transfers or something like the Earned Income Tax Credit to the minimum wage. It creates less havoc in the labor market and it more precisely targets the intended recipients, the poor. As to teachers….I’ll add another comment.

[Michael W. Kruse]

As to minimum wage for teachers in Texas and in Europe, I’m not familiar with the specifics of either case but a few general questions.

What is the purpose in creating a floor for the wage? Is there a shortage? The wage may create may be incentive for more people to be teachers but will they be any better? How will we know? How will we peg economic compensation to performance? It is my impression that compensation has much more to do with seniority than performance issues. There are a great many dedicated teachers in public schools but I suspect that part of what keeps salaries low is that, for a significant number, job security is an off-setting compensation to a higher salary which they might earn elsewhere or even in teaching if it were a more competitive market.

I’m not making a case for the total abandonment of public education but think the above concerns are critical.

[Andy]

Oh Michael,
I wish i had the time to engage you fully on this post. Sadly i don't but suffice to say you have more confidence in free market capitalism :)

[Michael W. Kruse]

I wish you had more time too. I really appreciate your conversation.

I do think that free market capitalsim is preferable to any other economic system. But my larger point I'm trying to make at my blog is that economic justice is not a simple formuliac exercise. There are differing aspects of justice and justice claims that must be held in dynamic reatlionship to each other. We need to evaluate actual outcomes versus good intentions.

Please drop back by as time permits. Peace!

[RonMck]

Michael
Being a teacher is a calling. Most parents would sooner have their children taught by a person who is called to be a teacher than someone who is teaching for the financial rewards. Teachers are lucky because they can earn a living (albeit a poor one) while exercising their calling. Most Christians can’t.

Most Christians find that the world does not value their calling as highly as they value it, or even as highly as God values it. My calling is to be a thinker and writer on political and economic issues. So far the income that I have earned from this calling is close to zero. I work in an occupation that is peripheral to my calling for four days a week, so that I can earn enough to support me in fulfilling the calling on my life. That is normal for most Christians.

Maybe, we need a campaign for a minimum wage for dreamers and visionaries. In the meantime, I will not be giving up my day job.

[Michael W. Kruse]

"Maybe, we need a campaign for a minimum wage for dreamers and visionaries."

LOL. No there is a thought.

[eclexia]

"economic justice is not a simple formuliac exercise"
That's great. I'm wrestling through frustrations I have with assumptions I hear about poverty. It takes me a lot of words to even get at what I'm really thinking and, by the end, am not sure I've even articulated what I'm arguing against. Your statement succinctly gets at what I push against--thinking of poverty and injustice and social responsibilities as formulas.

Also, Ron, if we're recommending ideas for minimum wage for valuable jobs that could definitely use a pay raise, let me throw out single mom trying to sort of swing being a stay at home mom for four kids :) I do work at home, so that's a bonus, but obviously only get paid for what I can actually do. Everything I do for money takes away from my ability to "be there" as a mom. I try to balance it, but don't always do too great on either side of it.

My preferred vocation is being mom. I can sort of do it while trying to make a living with medical transcription (which I also like), but end up shortshifting both. If I got paid to grieve the heavy things in the patient's lives I type for, I'd probably be able to make the living I need :)

If I got paid to do the things I'm passionate about, which I CAN do while I'm at home with my kids without shortshifting them--read, think deeply about what I read, feel my way through implications and applications from what I read--I'd be a millionare.

Sometimes I think, because I feel so deeply, that the best skill I have to offer the world is grieving. But, who wants a "professional griever", and there's something about paying for it that would cheapen the gift I have to give anyway (I suppose it's the same thing with being a mom--if I were doing it for pay, everything about why I do it and even what I do would probably shift in ways that wouldn't be very good for my kids.)