Chapter 38 Question 032

Why is it that in the same work group in the same company, the income of the least productive employees is generally higher than the value they create; the income of the most productive employees is lower than the value they create? Competitive labor market theory holds that workers earn in proportion to the value they create for their employers.In most organizations, however, employees performing similar jobs vary widely in productivity but not so much in wages.From the perspective of work contribution, top-ranking employees are underpaid, while bottom-ranking employees are overpaid.For low-level employees, the deal seemed like a good deal.But if top-notch workers are underpaid, why don't they switch to higher-paying employers?

At first glance, the situation seems to imply that a free lunch is on the table.Suppose a company's first-rate employees are worth $100,000 but only get $70,000 in salary, then a competing company can immediately pay $80,000 to poach the corner, and easily pocket a profit of $20,000.Even so, additional competing companies can still be profitable.So, that employee's salary should skyrocket to $100,000 very quickly if he can really create that much value. Why do wage patterns tend to stabilize in people's observations?To explain this phenomenon, one might first accept the assumption that most employees prefer to occupy higher positions in the work team and dislike lower ones.But not every employee who likes a senior position can get his wish.After all, fifty percent of the positions on the team are bound to be low-level positions.So the only way some employees can satisfactorily occupy senior positions is if others are willing to put up with the discontent inherent in lower positions.

Assuming that employers cannot force employees to stay in the organization against their will, then the only reason why low-level employees are willing to stay is that they can obtain additional compensation. So where does this extra compensation come from?It should come from a hidden tax on senior employees.If the amount of this tax is not large, then senior employees are happy to stay in the company, although they may earn more elsewhere; at the same time, junior employees also get extra compensation enough to compensate for the burden of being low.Therefore, the salary model of each company is functionally equivalent to a progressive income tax.

There are many careers, and there are a variety of positions available in different companies.People who don't mind high and low positions, it is best to go to a company with high employee productivity and accept low-level positions and enjoy extra salary.Others who value senior positions are better off accepting senior positions at firms with lower average productivity. While labor markets share many of the same characteristics as markets for goods such as cash registers and printing presses, there are also important differences.For example, employers don't have to worry about printers being lazy at work or stealing office supplies after get off work.These differences explain a number of interesting salary patterns and hiring practices, as a few examples illustrate.