Market rates for labor

[ksen]

What's the deal with "market rates" for labor?

(numbers are made up for discussion purposes)

For example, let's say we have a civil engineer (non-partner) working at a firm. The firm has decided that because of their marginal product research the rate for civil engineers is $80,000/yr.

Then sometime in the near future we get an influx of civil engineers and the market rate for them goes from $80,000/yr down to $60,000/yr because that's what economists say should happen based on the supply of civil engineers increasing but the demand for them remaining the same.

My question, in that scenario, is how does the amount of people willing to provide civil engineering labor affect the value (or marginal product) of the work they are performing such as to cause the amount they are paid to drop the $20,000/yr?

Is the work performed all of a sudden less valuable to the firm simply because of the amount of civil engineers available for hire? It doesn't seem to me like the amount of available workers should effect the value of the work they perform.

In the example the civil engineering firm isn't going to lower their billing rate simply because it doesn't have to pay its civil engineers as well as it had to in the past. It will continue charging as much as the market will bear and just pocket the $20,000/yr difference for itself.

 

[Jayjay]

That only works if there is a monopoly. In a competitive market, instead of pocketing all of the difference, a firm that is paying its engineers $60k instead of $80k will be able to outbid the companies that don't. This creates pressure in the other companies to reduce wages as well and eventually a new equilibrium is reached.

 

[dismal]

What's the deal with "market rates" for labor?

(numbers are made up for discussion purposes)

For example, let's say we have a civil engineer (non-partner) working at a firm. The firm has decided that because of their marginal product research the rate for civil engineers is $80,000/yr.

Then sometime in the near future we get an influx of civil engineers and the market rate for them goes from $80,000/yr down to $60,000/yr because that's what economists say should happen based on the supply of civil engineers increasing but the demand for them remaining the same.

My question, in that scenario, is how does the amount of people willing to provide civil engineering labor affect the value (or marginal product) of the work they are performing such as to cause the amount they are paid to drop the $20,000/yr?

Is the work performed all of a sudden less valuable to the firm simply because of the amount of civil engineers available for hire? It doesn't seem to me like the amount of available workers should effect the value of the work they perform.

In the example the civil engineering firm isn't going to lower their billing rate simply because it doesn't have to pay its civil engineers as well as it had to in the past. It will continue charging as much as the market will bear and just pocket the $20,000/yr difference for itself.

A couple points:
- when the price of civil engineers goes down the demand for them goes up.
- when the price of civil engineers goes down the supply of civil engineers goes down.
- eventually a new equilibrium is reached
- at that new equilibrium the firm at the margin is indifferent between hiring a civil engineer and not hiring one. If the firm expects $70,000 in margin from hiring a civil engineer and the price of the civil engineer it is $69,000 it would make the hire. If it was $71,000 it would not. If the price is $70,000 it is indifferent.
- not all firms have uses at the margin. One firm may have a use for a civil engineer that generates $1 million, another firm may have a use that generates $1000. If the market clears at $70k the first will hire an engineer and the second won't.

 

[Bronzeage]

Labor is a funny thing. It expands and contracts to meet the perceived compensation.

Market forces may push down the going rate for a Civil Engineer, but any laborer, from ditch digger to engineer, is the ultimate control of quality and volume of work produced. When the pay drops, something else will drop, too.

As for the partners and principals of an engineering firm, they don't have any more control over the billing rate than the engineer has over his salary. The most likely reason to have a glut of engineers is because of a shortage of projects. The principal is not likely to have a situation where they can exploit engineers and pocket the $20k.

A principal who wants to keep his doors open will bid at a competitive rate, and if there are cheap engineers to be had, competition for the few jobs there are, will drive drive down both bids and salaries.

 

[Jason Harvestdancer]

That only works if there is a monopoly. In a competitive market, instead of pocketing all of the difference, a firm that is paying its engineers $60k instead of $80k will be able to outbid the companies that don't. This creates pressure in the other companies to reduce wages as well and eventually a new equilibrium is reached.

And remember, competition only works to drive down wages, never to drive up wages. Any disparity is only and always at the cost of the worker. Never has demand for labor increased wages.

 

[laughing dog]

What's the deal with "market rates" for labor?

(numbers are made up for discussion purposes)

For example, let's say we have a civil engineer (non-partner) working at a firm. The firm has decided that because of their marginal product research the rate for civil engineers is $80,000/yr.

Then sometime in the near future we get an influx of civil engineers and the market rate for them goes from $80,000/yr down to $60,000/yr because that's what economists say should happen based on the supply of civil engineers increasing but the demand for them remaining the same.

My question, in that scenario, is how does the amount of people willing to provide civil engineering labor affect the value (or marginal product) of the work they are performing such as to cause the amount they are paid to drop the $20,000/yr?

Is the work performed all of a sudden less valuable to the firm simply because of the amount of civil engineers available for hire? It doesn't seem to me like the amount of available workers should effect the value of the work they perform.

In the example the civil engineering firm isn't going to lower their billing rate simply because it doesn't have to pay its civil engineers as well as it had to in the past. It will continue charging as much as the market will bear and just pocket the $20,000/yr difference for itself.

In your example, using traditional demand and supply analysis and starting from a point of equilibrium, you are postulating an increase in the supply of labor (more civil engineers are willing to work at the current labor rate of $80,000). This means an excess supply of labor (more civil engineers are willing to work at the current labor rate of $80,000 than there positions). Eventually the unemployed are willing to work for less ($60,000). Firms will hire civil engineers until the value of the marginal product is $60,000. In the end, using traditional economic theory, more civil engineers will be hired. And the value of the marginal product of the last civil engineer hired will be $60,000. This does not mean the value of the marginal product of every civil engineer is $60,000, just the last one hired.

 

[Loren Pechtel]

That only works if there is a monopoly. In a competitive market, instead of pocketing all of the difference, a firm that is paying its engineers $60k instead of $80k will be able to outbid the companies that don't. This creates pressure in the other companies to reduce wages as well and eventually a new equilibrium is reached.

Yup, this is the big thing the liberals miss--there are many options that aren't all the same. It's not one size fits all.

And remember, competition only works to drive down wages, never to drive up wages. Any disparity is only and always at the cost of the worker. Never has demand for labor increased wages.

And why do you say this? Companies scream very loudly about the unavailability of workers when this happens but it certainly does happen. If it wasn't for this everyone would be working for minimum wage.

 

[Bronzeage]

That only works if there is a monopoly. In a competitive market, instead of pocketing all of the difference, a firm that is paying its engineers $60k instead of $80k will be able to outbid the companies that don't. This creates pressure in the other companies to reduce wages as well and eventually a new equilibrium is reached.

And remember, competition only works to drive down wages, never to drive up wages. Any disparity is only and always at the cost of the worker. Never has demand for labor increased wages.

Of course it has. In New Orleans, right after Katrina, most of the fast food chains wanted to reopen their stores as quickly as possible. The starting wage was $15/hour because the great majority of their usual labor force had been evacuated, or was working for FEMA.

 

[Bar-Jesus]

What's the deal with "market rates" for labor?


Is the work performed all of a sudden less valuable to the firm simply because of the amount of civil engineers available for hire? It doesn't seem to me like the amount of available workers should effect the value of the work they perform.

People, companies will pay the lowest they can get away with. Just how you choose the shop that sells the same product for less.

 

[Will Wiley]

And remember, competition only works to drive down wages, never to drive up wages. Any disparity is only and always at the cost of the worker. Never has demand for labor increased wages.

Of course it has. In New Orleans, right after Katrina, most of the fast food chains wanted to reopen their stores as quickly as possible. The starting wage was $15/hour because the great majority of their usual labor force had been evacuated, or was working for FEMA.

And the fear of "wage inflation" was one of the if not the main reason rates were recently raised in the U.S. The Fed raised rates apparently because with unemployment around 5% (the so called natural rate) and possibly falling even more, there was, they thought, a danger that wages could rise because of a lack of "unemployed" people.

 

[crispy]

What's the deal with "market rates" for labor?

(numbers are made up for discussion purposes)

For example, let's say we have a civil engineer (non-partner) working at a firm. The firm has decided that because of their marginal product research the rate for civil engineers is $80,000/yr.

Then sometime in the near future we get an influx of civil engineers and the market rate for them goes from $80,000/yr down to $60,000/yr because that's what economists say should happen based on the supply of civil engineers increasing but the demand for them remaining the same.

My question, in that scenario, is how does the amount of people willing to provide civil engineering labor affect the value (or marginal product) of the work they are performing such as to cause the amount they are paid to drop the $20,000/yr?

Is the work performed all of a sudden less valuable to the firm simply because of the amount of civil engineers available for hire? It doesn't seem to me like the amount of available workers should effect the value of the work they perform.

In the example the civil engineering firm isn't going to lower their billing rate simply because it doesn't have to pay its civil engineers as well as it had to in the past. It will continue charging as much as the market will bear and just pocket the $20,000/yr difference for itself.

The short answer is 'yes'. The work performed is suddenly less valuable. How does that make sense in the real world? It doesnt in my opinion.

 

[Bomb#20]

And remember, competition only works to drive down wages, never to drive up wages. Any disparity is only and always at the cost of the worker. Never has demand for labor increased wages.

Though you shouldn't have needed one, apparently you needed a [/sarcasm] tag on that.

 

[Canard DuJour]

The dictum that workers receive the value of their marginal contribution is a carefully worded euphemism implying to speakers of colloquial English some relation of wages to the quality of the work or worker. In fact it means market conditions by which wages fluctuate regardless.

 

[Bomb#20]

Is the work performed all of a sudden less valuable to the firm simply because of the amount of civil engineers available for hire? It doesn't seem to me like the amount of available workers should effect the value of the work they perform.

The short answer is 'yes'. The work performed is suddenly less valuable. How does that make sense in the real world? It doesnt in my opinion.

That sort of argument is based on a mental model in which a good or service has an objective "value" that's independent of how much somebody wants it, as if a thing's "value" were like a physical quantity. It's intuitive folk-economics, and it's what appears to underlie most of the gut-felt hostility to market-based pricing.

When more civil engineers become available, that makes it easier to find one willing to do a job for you. That makes the consequence to an employer of losing the work done by one of the civil engineers she currently employs become less severe. Therefore she won't want to hang onto that engineer as much as she used to want to. That's what it means for her to value that engineer's work less than before. So it makes no logical sense to say the value of the work remains unchanged, unless by "the value of the work" you mean something different from "how much somebody values the work".

So if you mean something different from "how much somebody values the work" when you talk about how valuable some particular work is, what do you mean by "valuable"?

 

[Canard DuJour]

The short answer is 'yes'. The work performed is suddenly less valuable. How does that make sense in the real world? It doesnt in my opinion.

That sort of argument is based on a mental model in which a good or service has an objective "value" that's independent of how much somebody wants it, as if a thing's "value" were like a physical quantity. It's intuitive folk-economics, and it's what appears to underlie most of the gut-felt hostility to market-based pricing.

When more civil engineers become available, that makes it easier to find one willing to do a job for you. That makes the consequence to an employer of losing the work done by one of the civil engineers she currently employs become less severe. Therefore she won't want to hang onto that engineer as much as she used to want to. That's what it means for her to value that engineer's work less than before. So it makes no logical sense to say the value of the work remains unchanged, unless by "the value of the work" you mean something different from "how much somebody values the work".

So if you mean something different from "how much somebody values the work" when you talk about how valuable some particular work is, what do you mean by "valuable"?

I think people mean the utility of the final good or service - safe roads, bridges etc in this case. Which remains unchanged and does mean "how much somebody values the work," just not how little a middleman can get away with paying.

 

[crispy]

The short answer is 'yes'. The work performed is suddenly less valuable. How does that make sense in the real world? It doesnt in my opinion.

That sort of argument is based on a mental model in which a good or service has an objective "value" that's independent of how much somebody wants it, as if a thing's "value" were like a physical quantity. It's intuitive folk-economics, and it's what appears to underlie most of the gut-felt hostility to market-based pricing.

When more civil engineers become available, that makes it easier to find one willing to do a job for you. That makes the consequence to an employer of losing the work done by one of the civil engineers she currently employs become less severe. Therefore she won't want to hang onto that engineer as much as she used to want to. That's what it means for her to value that engineer's work less than before. So it makes no logical sense to say the value of the work remains unchanged, unless by "the value of the work" you mean something different from "how much somebody values the work".

So if you mean something different from "how much somebody values the work" when you talk about how valuable some particular work is, what do you mean by "valuable"?

I dont mean anything different from "how much somebody values the work", but what happens now, with more civil engineers, is that the work performed is suddenly less valuable, however, "how much somebody values the work" is unchanged.

 

[Jayjay]

"How much somebody values the work" is not unchanged. As an analogy, consider the value of pineapples in Europe: in 16th to 19th centuries, their relative rareness made them a coveted item among European elites, but now they are commonplace and one of the most mundane food items that we don't even think about it anymore. Yet pineapples themselves are bigger and tastier than ever before. The "value" of what something has isn't just its utility, it's also in perception, and availability affects that perception. If civil engineering becomes commonplace work, not only its price but also its value will diminish.

 

[ksen]

labor is not pineapples, hth

 

[Canard DuJour]

labor is not pineapples, hth

Neither are safe roads and bridges.

 

[EricK]

labor is not pineapples, hth

In a sense it is. But instead of you directly employing a single person to do a single job, you, and everybody else who wants pineapples, indirectly employs farmers and truck drivers, and container ship pilots, and supermarket shelve stockists and hundreds of other people to provide you all with pineapples. And the market price of the pineapple is some complex function of the market prices of all these people's labour.

But how do you feel about all these issues when you are the employer?

eg A new barbershop opens up in your town and so the cost of a haircut drops from $30 to $25 (figures made up), or you move to a new town where the market rate is $40 per haircut. And all the while the value to you of a haircut has not changed. Does this worry you at all. Do you think it is somehow wrong or unfair? Do you think there should be a set price for a haircut everywhere and at all times which never changes?