Friday, August 12, 2005

How much do you "deserve" in pay?

The simple answer: only whatever your employer believes you are worth.

The correct answer: only whatever your employer believes you are worth.

Let's first deal with free, voluntary trade. Suppose there are several people from whom I may buy widgets, and I deem each widget as worth no higher than $5. Why should government have the authority to force me to pay at least $6 for any widget, even and especially when at least one widget-maker would accept $5? Perhaps all widget-makers ask $6, save one who is competitive and offers to sell me widgets for only $5 each. He knows that, though his lower price means earning $1 less per widget, people will buy all his widgets first and he'll wind up ahead. But if he does sell me widgets for $5 each, we could both get in trouble with the law.

Wouldn't you agree that it's absurd for government to step in when we've peacefully and voluntarily agreed on a price? It's unfair to both sides, particularly since the government is not involved. Then why do so many Americans think it's appropriate for government to set a minimum price with labor? Why do so many Americans think $10 minimum wages are easy to implement, and that corporations are simply being "mean" and "cruel" to resist higher wages?

Now imagine that we're talking about labor instead of widgets. Labor is a commodity like any other: by hiring you, your employer purchases your labor. It sounds nice for you that you'll receive $(x+1) per hour instead of $x, but it is offset by hurting your employer. Besides the pure morality of my widget example, your employer cannot buy as many widgets as it would like: it can buy only 5 widgets for every 6 it could before. Similarly, let's say a law requires that employees be paid a minimum of $6 per hour instead of the person voluntarily accepting $5. An employer can now hire only 5/6 of the people it otherwise could: for every six people who'd otherwise be employed, one will now be unemployed. Don't you think he'd rather have a job at $5 per hour instead of demanding $6 and having no job at all?

That's what a minimum wage can do: money is finite, so if businesses cannot pass it on to others, they must hire fewer people when required to pay them higher wages. I originally wrote about the averse effects of minimum wages here, where I also examined the "inflationary" effects (see this for why it's not true inflation). If businesses maintain the same level of employment in the face of minimum wages, they must pass the costs on to their customers. Its customers will buy less from that business, unless they cut back on other spending (which will hurt other businesses). So a minimum wage does not come without a price to all consumers, but it hits two sections of society particularly hard. The poor depend on low-priced goods that are chiefly supplied by minimum-wage labor. Then there are those who were already earning what the minimum wage was raised to; the minimum wage drags them to the bottom of all wage-earners.

Another of my points was that minimum wages will skew the labor pool. Suppose the minimum wage is raised $2 per hour. Those who were making $2 per hour above the old minimum wage were most likely working harder jobs. But now they won't want to do those jobs, because they can earn the same doing low-grade jobs at the new minimum wage. I also cited Professor David Laband's FEE Timely Classic "The Minimum Wage's Dirty Little Secret", in which he examined the minimum wage's labor-substitutive effects.

Look at this for an example of what San Francisco's high minimum wage has done to its restaurant industry:
  • Despite serving more customers and registering higher sales, skyrocketing costs -- particularly related to labor -- are squeezing restaurants financially.
  • Restaurants are hiring less and eliminating jobs.
  • Menu prices are going up and table service is being reduced.
  • Owners have less capital to invest in their businesses and employees.
What good is a higher minimum wage to those it makes unemployable? Shall we look to the glorious example of France, whose government has completely wrecked its employment prospects? Don Luskin yesterday quoted part of a New Scotsman article that says young French are so optimistic about getting jobs in their home country, they're leaving in droves for the UK, Canada, the U.S. and New Zealand. [Edit: I inadvertedly omitted New Zealand.]

The bottom line: pure economics and sheer morality tell us that you "deserve" only what your employer is willing to pay you. And those who still insist on a minimum wage, well, had better be prepared to pay more.

What brought this topic to mind is a discussion I had Thursday morning with two co-workers. They not only favor high minimum wages, one actually said it's "----ing disgusting" that John Mack was slated to receive $25 million per year as the new CEO of Morgan Stanley, while some low-level Morgan Stanley employees make so little that they must work two jobs. First, I never knew any such employees, not even the single mother at our branch who had two children (she's a sales assistant). Second, any such employees are a rarity, probably the sole breadwinners for large families. Thus their problem isn't low pay, but having too many mouths to feed for the money. This is like what Walter Williams asked a welfare mother, who said she wasn't getting enough for her children: "Did you ever consider that you might have had too many children for the money?"

How many of these "underpaid" workers are as qualified as John Mack to run a Fortune 50 company? How many could even be a middle manager? How many have Mack's education, or put in his years of sacrifice? One does not work up the corporate ladder by working mere 40-hour weeks, and I dare say these top executives are so productive that they put in 40-hour days compared to most. It's not out of luxury that top executives' offices have private bathrooms with showers and several changes of clothes: it's necessity because the executives sometimes don't see home for days. Even convicted CEOs like Bernie Ebbers and Dennis Kozlowski had to work very hard to get to where they could loot their respective companies.

This isn't to say I have no compassion for those who are struggling to make ends meet, but then they should either become more competitive or work longer hours. I've had to do the latter, and there's no shame in it. Ted Nugent once said on Sean Hannity's radio show that he has a solution for poverty: "Get a job!" And if you can't work longer hours, instead of calling upon almighty government to force people to help you, I'll be happy to help you, if in my judgment you cannot help yourself. I've been annoyed with those who accuse me of being unchristian because I don't believe government should engage in charitable activities. This is not to brag, but I've donated a fair amount over my short years to various charities. Rich liberals like Michael Moore, Streisand and Bono would do better to shut their traps (and stop complaining about income inequality that they themselves personify) and open their pocketbooks.

This is a topic for another time, but how can my co-workers complain about income inequality when they purchase popular music and help turn musicians into millionaires? They also attend various sporting events, and since this is New York, the main sports team is the Yankees. Hmm. If they don't think A-Rod is worth umpteen million dollars per year, why do they continue to patronize the Yankees and their sponsors? Let them vote with their pocketbooks.

On an aside, A-Rod's bio page mentions that he donated $3.9 million in 2002 to the University of Miami "to fund annual scholarship for a Boys & Girls Club member as well as to help fund a renovation for school's baseball stadium." That's class. By contrast, I never heard that Bono or the other Live8 performers doing anything but (besides showing their age and resting on laurels) calling for Western governments to forgive poor African nations' debt. Not once did I hear of them selling a house, or even a car, and donating that money.

Mack has since declined the generous compensation, which is too bad since it was apparently from employee pressure. I think he just might be the man worth that much, the man who can turn Morgan Stanley around. He was CEO until Morgan Stanley's 1997 merger with Dean Witter, after which he served as president under CEO Philip Purcell; Mack resigned in 2002, reportedly because of clashes with Purcell and disappointment in not reaching the CEO position.

Is Mack overpaid? Well, Walter Williams justified whatever pay CEO's companies offer them, and I had some additional commentary. The worker is worthy of his hire, and CEOs are no exception. Morgan Stanley wouldn't have offered Mack such a gigantic package if they didn't think he would grow the business (or cut costs) by at least that much.

Morgan Stanley recently announced plans to lay off about 1000 of its 11,000 current brokers, streamlining the retail end of its business. That's not a bad thing: I speak from personal experience when I say Morgan Stanley shouldn't have hired so many new brokers in the first place. The sales side of the industry is already competitive enough, and Morgan Stanley (or any other big securities firm) doesn't need to dilute its business. This will affect mostly new brokers but also some that have been around a while. It's not a happy thing for people to lose their jobs, but the first duty of a business is to earn maximum profit for its stockholders, not hire people.

Let's say the 1000 are all new financial advisors making only $30,000 base salary. With benefits, training seminars, etc., they probably cost the company $40,000+ annually. So Morgan Stanley right there will save $40 million dollars, and it won't lose any business. The accounts (that is, those that aren't transferred to other firms) will be distributed among the remaining brokers, who are generally productive enough to take care of a few more clients apiece.

Morgan Stanley has said the layoffs are not Mack's idea. They could be the directors' idea, their way of affording hiring him. Either way, he could prove himself worth $50 million a year. Just as Walter Williams asked about Jack Welch and CE, if John Mack does turn Morgan Stanley around and improves revenue by $2 billion, isn't that worth paying him $25 million?

6 Comments:

Blogger Mike said...

"but the first duty of a business is to earn maximum profit for its stockholders, not hire people."

We, as a country, too often forget this. Hence the outrage over outsourcing. Like my dad says, it's no one's fault but your own if you are too stupid and/or uneducated to have job skills that are transferable.

Friday, August 12, 2005 12:29:00 PM  
Blogger TKC said...

You're being a tad bit unfair to Bono.
http://pubcrawler.blogspot.com/2005/05/bono-u2-singer-figures-out-how.html

I've run into plenty of 'liberals' that think goverment welfare is the same thing as charity.

Friday, August 12, 2005 6:48:00 PM  
Blogger Perry Eidelbus said...

Bono and his wife have it 1/3 right. Why are "organic materials" a must, when they likely will add to the product's final cost (as compared to using other materials)? Consumers will then buy less of the product

The "fair labor practices" mean things like higher wages. That's nice for those who receive them, but a business then must hire fewer workers. Or the business can past the cost on to buyers, who in turn will buy fewer of the goods because the "fair labor practices" make them more expensive.

Not a bad start for Bono. He might be getting a clue.

Saturday, August 13, 2005 12:29:00 AM  
Blogger TDM said...

only whatever your employer believes you are worth.

What you deserve in pay is actually what your employer beileves you are worth to the next highest paying employer. To be employed you must be paid less than what you are worth to the employer.

Saturday, August 13, 2005 1:51:00 AM  
Blogger Perry Eidelbus said...

An employer would have to pay you at least slightly more than someone else who wants to employ you, depending on available substitutes for you.

Saturday, August 13, 2005 10:25:00 AM  
Blogger TKC said...

At least Bono has picked up the clue phone. Many in his line of work just let it ring.

His business model doesn't seem to be all that great. As you point out, he seems interested in higher labor and material costs. He can overcome this in two ways: 1)lower profits or 2)higher prices. Either one could kill his business. Lower profits scares off investors and higher prices scare off customers, which in turn lowers profits and scares off investors.

Still, if he can get investors to come on board of their own free will and can get people to buy possibly more expensive clothes, then he might succeed. So long as he is not coercing people to invest (tax breaks or subsidies) and is not coercing people to buy (protectionist tariffs) then I wish him the best of luck on his business endeavor.

Saturday, August 13, 2005 7:53:00 PM  

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