Market rates for labor

[Harry Bosch]

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?

Agreed. It's hypocritical for individuals to complain about companies trying to control their labor costs when they are constantly trying to find the cheapest products and services that they can.

 

[whichphilosophy]

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.

Hire poor engineers and it costs millions to rectify the errors through poorly thought out design. Hire a good professional or a professional team and the errors are minimal. In the Oil and Gas industry this also applies to other fields (as well as civil). That is why many companies are still prepared to pay more for the value of the labour not the cost of the labour. Some can get away with exploiting the engineers, but many will simply find other jobs. Don't expect loyalty based on peanuts. Apple which of course is a different discipline has only had 2 staff leave in 15 years. All are paid well and meet the rigid expectations which has made it once again a world leader.

 

[Alcoholic Actuary]

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

I think the answer varies wildly around the conditions supporting any specific scenario. The supply/demand for the labor, the cost associated with the type of labor, alternatives to the labor provided (technology) etc.

(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.

So this is a very specific scenario (which is good because it makes it easier to address). So we don't know why the supply of engineers increased, just that it did and also that this solitary force caused a drop in the market salary of an engineer from $80k down to $60k - with no concomitant decrease in the price of services provided by engineering firms. This last part is also kind of critical to the answer, but wasn't mentioned so I'll assume it.

In this case, the value of the work performed by an engineer for this firm did not decrease. Only the cost of engineer specific labor decreased. So yes, the firm will probably pocket the difference. But what exactly is that difference? I don't think the firm would fire all their current engineers and hire all new cheaper ones. And I also don't think they are going to give all their employees pay cuts to reflect the market (they certainly could do so with little repercussion since the alternative would be for the employee to quit and find new employment in the now cheaper market, but I doubt any real firm would do that to their skilled labor force - maybe unskilled). Worst case, they may not give raises to their engineers this upcoming year. The benefit will most likely be borne out in the demand for new engineers (constant from prior years in your scenario). Assuming they hire 1 engineer per year, they now have a $60k expense where previously they had (and likely budgeted for) an $80k expense. In this case, they will most likely pocket the difference. This extra profit could be temporary once the supply moves back to 'regular' levels and the cost of engineer labor returns to $80k or might get sucked back into the company if the supply dwindles and engineer labor increases to $100k in subsequent years.

aa

 

[fromderinside]

A couple of things about a couple of things.

Civil engineers task life, for want of a better term, is approximately 7 to 10 years, yet, as markets reflect supply/demand is computed at today's rate without taking into account this little factor. Even with piecework of 1960s era key punch operators training inexperienced clerks took about six months.

So market rates seem pretty shaky as index for fair and equitable price.

Its one thing to have too much oil supply where the commodity is the oil. Its quite another to have too much worker supply where the commodity is only the worker's labor. Seems another model need be imagined here.

Of course for the most part it has except where those who demand the market only works when it works on commodity as total item not an aspect of the item being bartered. Having no ability to separate the worker form his labor, the worker is ignored and only his labor is considered. People die of starvation in those situations. But that isn't a problem of the system it is claimed.

Socialism mixed with capitalism has provided many fixes which work better than boom bust capitalist propulsion. Don't denigrate that which makes the system work better.

 

[whichphilosophy]

A couple of things about a couple of things.

Civil engineers task life, for want of a better term, is approximately 7 to 10 years, yet, as markets reflect supply/demand is computed at today's rate without taking into account this little factor. Even with piecework of 1960s era key punch operators training inexperienced clerks took about six months.

So market rates seem pretty shaky as index for fair and equitable price.

Its one thing to have too much oil supply where the commodity is the oil. Its quite another to have too much worker supply where the commodity is only the worker's labor. Seems another model need be imagined here.

Of course for the most part it has except where those who demand the market only works when it works on commodity as total item not an aspect of the item being bartered. Having no ability to separate the worker form his labor, the worker is ignored and only his labor is considered. People die of starvation in those situations. But that isn't a problem of the system it is claimed.

Socialism mixed with capitalism has provided many fixes which work better than boom bust capitalist propulsion. Don't denigrate that which makes the system work better.

Many engineers work as subcontractors or agency staff moving from project to project. The life of civil engineering can be from around a few months to 3 months for a construction project. If his company has a lot of projects he sometimes will divide his time or join new ones. The best engineers can work on several projects at a time. The skill lies in the ability to make fast decisions and as much as possible proper evaluation of land surveys etc.

Large corporations who are involved a lot of construction (such as Humberoak McAlpine in the UK) can keep a core of key management staff. However this company is constantly being hauled into the courts or suing others. Reading through certain case files, it tends to be more about a conflict with its Client as to what is required. Also companies who bid less often look at cutting corners on detail. From my own experience in evaluating bids, I do not eliminate the most expensive first. Many of the cheaper bids, give requites when questions are raised about certain qualities of construction material, the depth for piling or the condition of the ground (soil is too soft regardless of the survey).

In China you can tell which construction companies won a job on a bottom dollar (or possible bribe basis) after an earth quake. Many buildings will be left standing. For those that are not, the company directors and key managers are hauled in the courts, and frequently executed where lives were lost.

Perhaps the mixed economies such as socialism and capitalism are more about applying common sense as both systems do not benefit the average citizen if rigidly applied.

 

[Bomb#20]

... 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.

But the final good or service is not the same thing as the civil engineer's work. She designs a safe bridge; people prefer having that bridge to not having it. So what? That doesn't mean they value her work the amount they value the bridge. She didn't build that! The bridge is the synergistic result of thousands of people's contributions, including workers, managers, entrepreneurs, investors, regulators, police, and, yes, even middlemen. If you propose to define the value of her engineering work based on measuring the utility of the bridge, how are you going to do that?

For that matter, why would you even think the utility of the bridge is unchanged by the rise in engineering availability? If people didn't have the bridge they'd have to make other arrangements. Like any other input, when engineering services become more available, that makes it easier for people to make other arrangements. So the consequence of not having the bridge becomes less harmful. So why would people value it as much?

 

[crispy]

"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.

You can't extrapolate this example to every good in the world. Its too simplistic. If I need a house I need it just as much if it costs 200,000 or 210,000.

 

[Bomb#20]

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.

On it's face, what you wrote is self-contradictory -- you say A and B mean the same thing, A changed, and B didn't change. I take it the resolution lies in the identity of "somebody". If "how valuable it is" means "how much somebody values it", then it's possible for the work to be less valuable because somebody values it less, even though at the same time how much somebody else values the work remains unchanged. Is that correct?

So when you say the work performed is suddenly less valuable, who are you saying values the work less? When you say "how much somebody values the work" is unchanged, who are you saying values the work as much as ever?

 

[crispy]

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.

On it's face, what you wrote is self-contradictory -- you say A and B mean the same thing, A changed, and B didn't change. I take it the resolution lies in the identity of "somebody". If "how valuable it is" means "how much somebody values it", then it's possible for the work to be less valuable because somebody values it less, even though at the same time how much somebody else values the work remains unchanged. Is that correct?

So when you say the work performed is suddenly less valuable, who are you saying values the work less? When you say "how much somebody values the work" is unchanged, who are you saying values the work as much as ever?

It doesnt matter who values the work less - in this case the engineer is getting paid less, the house costs less (both are valued less by the producer). However, you will have a hard time convincing me that the buyer of the house suddenly also values the house less. I know thats how the theory goes, but I'm saying the theory is too simplistic. Something is missing.

 

[Axulus]

On it's face, what you wrote is self-contradictory -- you say A and B mean the same thing, A changed, and B didn't change. I take it the resolution lies in the identity of "somebody". If "how valuable it is" means "how much somebody values it", then it's possible for the work to be less valuable because somebody values it less, even though at the same time how much somebody else values the work remains unchanged. Is that correct?

So when you say the work performed is suddenly less valuable, who are you saying values the work less? When you say "how much somebody values the work" is unchanged, who are you saying values the work as much as ever?

It doesnt matter who values the work less - in this case the engineer is getting paid less, the house costs less (both are valued less by the producer). However, you will have a hard time convincing me that the buyer of the house suddenly also values the house less. I know thats how the theory goes, but I'm saying the theory is too simplistic. Something is missing.

If there are more houses available because there are more engineers available for lower cost and, as a result, some additional houses get built, then why wouldn't you believe that a buyer would value a particular house in that area less? Before, there were fewer housing options, so that particular available house is valued more. Now, there are more housing options. That particular house is now less valuable to them since there are additional alternative options available and, as a result, they will reduce the price they are willing to pay.

More available options reduces the value of any one particular option.

 

[Axulus]

"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.

You can't extrapolate this example to every good in the world. Its too simplistic. If I need a house I need it just as much if it costs 200,000 or 210,000.

But your willingness to pay the asking price is based not only on your need for "a house" but this one house in particular that is actually for sale. If there are lots of housing options available to you, then the value you place on any one in particular drops. It's not as big a deal if you don't get the one in particular you are looking at because you have so many other choices. Contrast this with a scenario where you have only two or three choices. Suddenly the one house you are looking at becomes extremely valuable to you and hence the price you are willing to pay increases.

The confusion seems to be the distinction between the value you place on a category of things (a house to live in, in general) vs the value you place on a particular object within that category (the house I am actually looking at that is actually for sale vs alternative housing options).

 

[Axulus]

labor is not pineapples, hth

Neither are safe roads and bridges.

If there are two safe roads to drive on, then the value of each road drops vs a scenario where there is only one safe road to drive on.

The value of one particular safe road can indeed drop.

Furthermore, even if the final product is valued the same, the relative value of each input that went into producing it can change. There is no objective value to any one of the thousands of inputs that went into the production of the bridge.

 

[Axulus]

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.

Having the work performed by one particular identifiable civil engineer does drop. If you no longer perform it, I can find someone else to perform it. That means the value of you performing the work drops. I'm not willing to pay as much when I have so many other options available.

The value of the end product will also tend to drop. If there are more people available to do the work for cheaper, competing firms will create more quantity of the end products, meaning the value of any one of the particular end products that exist in the world drops.

The more options that one has to fulfill a want or need, the less valuable each particular option becomes.

 

[whichphilosophy]

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.

Having the work performed by one particular identifiable civil engineer does drop. If you no longer perform it, I can find someone else to perform it. That means the value of you performing the work drops. I'm not willing to pay as much when I have so many other options available.

The value of the end product will also tend to drop. If there are more people available to do the work for cheaper, competing firms will create more quantity of the end products, meaning the value of any one of the particular end products that exist in the world drops.

The more options that one has to fulfill a want or need, the less valuable each particular option becomes.

The first two sentences are not clear. It depends on the company structure. If it is a company whose project work fluctuates, it can take on specialists as needed. A major company may keep some key engineers on even if the work drops. This is usually for preparing bid packages. By the way an engineers who can produce effective technical bids is invaluable, even though there is a commercial and contracts department to do this work. In fact they consult with the engineers. Many civil engineers work on contract and are often taken on at high rates if they are especially skilled.

However the mentality of understanding the cost of everything and the value of nothing would throw Europe and the US into countries with third world thinking of paying the least possible (and then taking off more when the contract is completed).

 

[whichphilosophy]

Neither are safe roads and bridges.

If there are two safe roads to drive on, then the value of each road drops vs a scenario where there is only one safe road to drive on.

The value of one particular safe road can indeed drop.

Furthermore, even if the final product is valued the same, the relative value of each input that went into producing it can change. There is no objective value to any one of the thousands of inputs that went into the production of the bridge.

What happens if the bridge collapses after three months? There are not many causes of this but would often be found in failure to double check the site conditions and ground density, depth of piling (or reducing the depth of piling to save time, taking on cheaper engineers who do not have certain qualifications or are just out of college, failure to spend the money on an engineering inspector to physically and pedantically go through the completed work. This takes longer and it can be expensive, but cutting corners may in the end cost more.

 

[TV and credit cards]

What happens if the bridge collapses after three months? There are not many causes of this but would often be found in failure to double check the site conditions and ground density, depth of piling (or reducing the depth of piling to save time, taking on cheaper engineers who do not have certain qualifications or are just out of college, failure to spend the money on an engineering inspector to physically and pedantically go through the completed work. This takes longer and it can be expensive, but cutting corners may in the end cost more.

Yes. Consideration must be given to the quality of the end product or service being rendered. I think there are many factors for different situations that will be unique to an industry. Screwing two widgets together will have different considerations than the service employees render at an expensive hotel. But in all instances, it's the end product, not the employee. Can the more expensive employee draw more business? If so, then she is worth it.
If Alice is a good dependable waitress and all my regulars love Alice and Alice wants a raise I can afford, do I give it to her? Do I take a chance and let Alice go and hope the next waitress is just as good? Waitresses may be a dime a dozen but finding another Alice may be difficult and my customers may not like it.

 

[Jason Harvestdancer]

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.

You're absolutely right. I thought it was obvious, people took it seriously.

 

[Bomb#20]

So when you say the work performed is suddenly less valuable, who are you saying values the work less? When you say "how much somebody values the work" is unchanged, who are you saying values the work as much as ever?

It doesnt matter who values the work less - in this case the engineer is getting paid less, the house costs less (both are valued less by the producer). However, you will have a hard time convincing me that the buyer of the house suddenly also values the house less. I know thats how the theory goes, but I'm saying the theory is too simplistic. Something is missing.

But the theory doesn't say the buyer suddenly values it less; it will certainly take a while for the consequences to filter through the economy. First some input such as engineering costs less; then developers notice that house-building became more profitable; then some of them start more houses than they would have otherwise; then the extra houses are finished so more houses come on the market; then sellers notice their own houses are taking longer to sell than they expected because buyers have more options; then some sellers lower their prices as their desire to hold out for their original asking prices bumps up against their desire not to have all their net worth tied up in an asset they want out of; then buyers' perception of how much they can realistically expect to have to pay for a house goes down; then they think about the other stuff they could buy for $10,000 and decide they'd prefer to have $10,000 and the house than to have $210,000, but they're no longer willing to give up $210,000 to get just the house, because they think they could probably get just as nice a house from somebody else and still have $10,000 left over. How much stuff they're willing to do without in order to get that house has decreased. The time lag is probably two or three years.

 

[Bronzeage]

If there are two safe roads to drive on, then the value of each road drops vs a scenario where there is only one safe road to drive on.

The value of one particular safe road can indeed drop.

Furthermore, even if the final product is valued the same, the relative value of each input that went into producing it can change. There is no objective value to any one of the thousands of inputs that went into the production of the bridge.

What happens if the bridge collapses after three months? There are not many causes of this but would often be found in failure to double check the site conditions and ground density, depth of piling (or reducing the depth of piling to save time, taking on cheaper engineers who do not have certain qualifications or are just out of college, failure to spend the money on an engineering inspector to physically and pedantically go through the completed work. This takes longer and it can be expensive, but cutting corners may in the end cost more.

My former father-in-law was an Electrical Engineer. In his later career, he became a consultant who was brought in by contractors to design specific parts of the project. He had over 35 years experience in power transmission. When you needed a transformer station for an oil refinery, he was the man you hired.

I listened to a lot of what he said about the money side of engineering work. It was common for him to be brought in and then be asked to take on the job of checking other engineer's work. He said if they wanted a lead engineer, they should hire one and pay him accordingly. His work was billed by the hour and he was paid by the hour. He did an excellent job for what he was paid to do, but was not going to work at a discount.

As for what happens if the bridge collapses in three months? It's usually discovered that the contractor disregarded the engineer's specs and took shortcuts.

 

[Canard DuJour]

So this is a very specific scenario (which is good because it makes it easier to address). So we don't know why the supply of engineers increased, just that it did and also that this solitary force caused a drop in the market salary of an engineer from $80k down to $60k - with no concomitant decrease in the price of services provided by engineering firms. This last part is also kind of critical to the answer, but wasn't mentioned so I'll assume it.

In this case, the value of the work performed by an engineer for this firm did not decrease. Only the cost of engineer specific labor decreased. So yes, the firm will probably pocket the difference.

Exactly.

But what exactly is that difference? I don't think the firm would fire all their current engineers and hire all new cheaper ones. And I also don't think they are going to give all their employees pay cuts to reflect the market (they certainly could do so with little repercussion since the alternative would be for the employee to quit and find new employment in the now cheaper market, but I doubt any real firm would do that to their skilled labor force - maybe unskilled).

They increasingly don't need to because they don't have employees as such, but hire per-contract, increasingly via subcontract and agencies.

(ETA : as others point out)