Home > Uncategorized > The Illogic in Wages

The Illogic in Wages

There has been a lot of talk lately about executive pay yet very little people comment on low pay as well.

I’ve heard numerous people talk about how executives are paid 300times the lowest paid but aren’t 300 times more productive than the lowest paid. Part of the problem is this is as far as they go.

They only look at strategies to increase low pay and potentially decrease high pay. They don’t look at ways that we could recalibrate the “market(s)” in wages & the ideas behind wages at all levels in order to reduce inequality.

They’ve done what some Doctors tend to do, they see the symptoms & they treat them without looking closer as to what is causing the symptoms.

I put the market(s) in quotations marks above simply because I don’t believe in markets, I do believe in human irrationality.

David Cameron, has said that excessive high pay is a result of a market failure. Its not. Its a fault of our own irrationality.

Behavioural economics has shown that we are incapable of comparing two things that aren’t similar. In the wage “market”, this mean we find it difficult to compare the value of a low-skilled worker, to a medium-skilled worker and a high-skilled worker.

For example, your company is hiring a computer programmer and a marketing person. What should their salaries be?

In order to work out that question, we look at what other computer programmers earn and what other marketing people earn!

We’ve separated out each job and compared it to other similar jobs rather than trying to assess how much value, they will bring to the company. We’ve created two separate “markets”. Its the same for every other industry.

Its worse for CEOs, because they especially know what other CEOs are earning.

If a CEO sees a CEO of a rival company earning more than them but performing the same, they get jealous and start demanding pay rises.

At the bottom, everyone knows people are getting approximately minimum wage, so there is no real demand to raise the minimum wage like there is at the top end of the pay scale.

The other illogic when it comes to wages is the presumption that in order to get the best people for the top jobs, you need to pay them a big salary, whilst at the bottom, reducing people’s salary is not going to hinder performance.

Regardless of where you are in the wage scale, we all act the same with regard to pay and performance. If you pay us too little we won’t perform well, pay us too much or beyond what we need in order to be able to live to a decent standard, we won’t perform well.

The question is, how do we iron out the irrationalities in our behaviour so everyone can have a decent standard of living? How do we get rid of the illogic behind our wages?

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