Many years ago, one of my daughters once asked me why everyone did not earn the same amount of money. Wouldn’t it be fairer if everyone just got the same? After all, if it’s someone’s birthday at school and they bring sweets for the class, they are divided equally among everyone.
I explained that not all jobs are the same. Some are really hard work, or unpleasant, or dangerous, or they mean that you need to work at night or over the weekend. People may not want to do a job carrying heavy loads all day, cleaning sewers, installing aerials on tall buildings, or driving trains at 5am unless they get paid a bit more than jobs where all you need to do is sit at a desk and tapping on a computer keyboard all day. And on top of that, some jobs are so difficult to do that there are not many people who can do them. An employer who needs such a worker needs to offer enough money, otherwise, they will go and work for their competitor.
Working for free, but not for nothing
None of this will surprise you. But was that the whole story? As so often with economics concepts, once you start looking at the detail, things become a little more complicated.
A contract of employment is really a transaction between employer and employee. The employer has a need that the employee can fulfill, and the fulfillment of that need represents a certain value to the employer. This is as true for individuals who want their house decorated as for the supermarket that needs shelves stacked or for the IT firm that needs software developed. It is this value that determines the maximum the employer will be prepared to pay an employee. When employees, on the other hand, choose to work for the employer, they incur an opportunity cost: they give up all other things they could do with the time. Some of these things are productive (e.g. other jobs providing an income, or tasks around the home like cleaning or painting, which save money since nobody needs to be hired to do them); others are not (like watching daytime TV or playing with the kids), but are enjoyable in their own right.
In such a transaction, all this gives both parties a limit beyond which they will not go: employers will not pay more than a given amount ( WTP), and employees will not accept less than a given amount ( WTA). As long as WTA is less than or equal to WTP, work will be done.
But wait. ‘Pay’ suggests we talk about money, but is that the only thing that matters? Volunteers receive no money at all, and they still give up their time — arguably time that, if it was overtime at work, they’d expect to be paid more than their normal wage.
It seems that there exists some kind of immaterial, a mental utility that can compensate volunteers for their effort, and that is equivalent to whatever they would need to be paid if they did not perform this task as a volunteer. There is a correlation between people’s reported wellbeing (this mental utility) and engaging in volunteering, but is this because happier people are more likely to become volunteers, or because volunteering makes people happier?
Recent research by Ricky Lawton and colleagues investigated this question and concluded that volunteering is associated with a positive change in wellbeing — equivalent with an income differential estimated at £911 (€1000, $1200). In other words, to undo the improvement in wellbeing a member of a median UK household experiences a result of volunteering (in comparison with how equivalent non-volunteers feel), they would need to endure a £911 reduction in their income.
This can help explain why some doctors choose to work for Doctors without Borders at a starting gross salary of $2,039 per month (£1600, €1700) , considerably less than they might earn as a physician in their home country. If volunteering or working in a charitable organization can provide a sense of purpose that can be equivalent to an amount of money, then other aspects about a job that has a positive influence on our wellbeing may well do something similar.
Some jobs come with specific benefits — free drinks or fresh fruit, discounted gym membership, health insurance, and so on. Often these have a financial value which, to the employee, is higher than the actual cost to the employer, so such a combination of pay and benefits makes obvious economic sense to both parties. But they may also carry an immaterial value: an employer who provides such benefits signals an attitude and a culture that may be more attractive than that of an employer that offers just a barebone salary and nothing else — even if the salary in itself is appreciably higher.
The weight of the immaterial
And what about entirely immaterial job characteristics? Imagine two jobs that are identical in all material aspects (income, benefits, time and cost of commuting) — the kind of situation my young daughter described way back when. The first one leaves you feeling pretty indifferent, while the other makes you feel good when you return home in the evening — perhaps because the location is more pleasant, or because it is more meaningful to you. The latter job would probably be more appealing, and for both jobs to be entirely equivalent, the former would need to provide a higher wage. If you are only in it for the money, you might opt for the former, otherwise, you might prefer the latter position.
Jamie McCallum, a sociologist, and self-identified activist, argues in a new book, Worked Over (reviewed here), that the shift towards meaningful work has coincided with wage stagnation — work is no longer a personal sacrifice that requires full compensation, but “something we do for our own good”. He cites studies claiming that a meaningful job is worth $20,000 more per year and that 90% of workers would be willing to give up some benefits in return for more meaningful work. This suggests it is possible to use ‘meaning’ as a “low-cost instrument to stimulate work effort”. Why pay employees more if you can give them meaning for free?
Framed like this, it sounds like exploitation in disguise. But is it really? If we can indeed be motivated both by extrinsic influences like money and by intrinsic influences like meaning and purpose, is there a reason why one should necessarily be preferred over the other?
The doctors who have a choice between a career in mainstream medicine and working for Médecins Sans Frontières face a trade-off between these extrinsic and intrinsic motivations. For some, the relatively lower income will be more than compensated by the fulfillment of providing medical care to people who are most in need and least able to afford it around the world. Others will prefer the higher income of a more conventional job.
And, although the trade-offs may not be as extreme, so it is in many other situations. Perhaps, what I missed in my explanation to my daughter so many years ago, is that jobs mean different things to different people. Maybe that, more than anything else, explains why not all jobs come with the same salary.
For the right wage is made up of more than just money.
Originally published at http://koenfucius.wordpress.com on October 9, 2020.