Last week I said we’d start exploring the relationship between the motivator factors described by Frederick Herzberg and James Surowiecki’s wise crowds as a way of describing the sort of investments business leaders should make in their employees.
But over the last few days I’ve seen several more articles about Dan Price and Gravity Payments. I’ve talked about Dan before and I really like what he’s doing. His experience has been a compelling, real-life example of what I’m trying to describe on this blog, and I read just about every article I see.
So I was brought up short when one of the more recent articles about Dan quotes him as saying that “establishing a $70,000 minimum wage is a moral imperative, not a business strategy.”
Is it? A moral imperative?
So far I’ve taken the position that it’s not anyone’s place to decide what’s a moral wage. It strikes me as a fundamentally un-capitalist thing to say what we pay our employees is a moral question. Market wages are, by definition, the average of the wages that thousands of willing employees and thousands of willing employers agree on to accomplish any given task. So, burger flippers make $7.50 an hour and good welders make $100,000 per year. That’s not my decision, it’s the market’s. And the people in the market are, on the whole, not dumb, so how is it immoral of me to pay my employees less than $70,000 if the market salary is $35,000 and my employee willingly accepts that salary?
I’m reading a new book, Thinking Fast and Slow, by Daniel Kahneman, that talks about our tendency to accept what is familiar as true, so I took the time to reflect on this position.
There’s a central assumption about market wages that bears some scrutiny: whether market wages really are the average of the independent decisions of a bunch of employers and employees meeting in a marketplace with perfect information and a tendency to act rationally in their own self-interest.
When I stopped to think about it, I realized that this probably isn’t true. I’m not an economist (although I almost was) but the idea of a market wage, or, more precisely, a market-clearing wage, is a theoretical construct that doesn’t describe reality very well.
In The Wisdom of Crowds, James Surowiecki cites an interesting study into retail price-setting. He cites the study as evidence of the proposition that convention has as much to do with price-setting as does the demand for a particular good. In effect, he says, “companies [simply] decided on the price they were going to charge and charged that price regardless of what happened.” Now I know that’s a simplistic construct, but if he’s generally right about the strong role that convention plays in how prices are set (and I think he is), there are some important correlations about retail prices and wages that can be made.
After all, wages are simply the price of labor, and the people who decide retail prices are very often the same people who decide wage rates. Just as retail prices are not pure reactions to shifting demand patterns, wages are not set by pure reaction to shifting labor needs. Employers routinely decide that a job function isn’t worth more than a certain wage, regardless of the employee’s demands. With a global economy, accommodating an employer’s decision in this regard is easier than ever. On the other hand, employers also frequently decide to pay their employees more than the market wage.
In any event, I’m not particularly concerned here with why the theory of a market wage doesn’t match the reality of how wages are determined; it’s sufficient to acknowledge the possibility that it doesn’t.
It’s sufficient for my purposes here because if you accept the possibility that market wages aren’t really an accurate reflection of the objective value of a particular job, it’s a whole lot easier to accept the idea that we should consider morality in determining what to pay our employees.
There’s a second important assumption of how market wages are determined that is relevant here. That is, to the extent that market does reflect the average of the expectations about wages held by thousands of employers and employees, there’s nothing to say the market wage actually arrives at the right outcome. The wisdom of the crowd being what it is, the market wage—to the extent it reflects the right outcome at all—is just a better approximation than any individual participant is likely to arrive at.
In other words, because the labor market is essentially an open market in the U.S., and because the market wage is essentially the average of the decision of all participants in any given sector, the market wage takes into account the judgments of all the decision-makers, the good ones and the bad ones. Some are really good, and some are really bad. And as James Surowiecki points out, the crowd is wiser when more people—not fewer—contribute to the decision-making process.
The critical question is how that moral position is expressed in the market. Each market participant is a flawed participant. We have biases, incomplete information, and idiosyncrasies that make our individual judgments less reliable than they otherwise could be. Thankfully, our flaws are not all aligned. If we’re permitted to act independently on the basis of our own convictions, moral or otherwise, and regardless of our flaws, Adam Smith’s invisible hand takes over and our flaws begin to cancel each other out, leaving the market result better than we’d reach individually.
So the fact that a market wage exists isn’t an argument against taking a moral position at all. In fact, it’s an argument for taking a strong moral position about what wages should be. By contributing our moral convictions to the market decision-making machine, we’re actually making the market result better.
So I guess I agree with Dan; as long as he means its an individual moral imperative and not a governmental one, establishing a $70,000 minimum wage is a moral imperative.
Just don’t tread on me.