The Equalisation of Net Benefits

It is often assumed that in a purely free market for labour the wages of all workers will tend to be equal as workers in lower paid jobs enter industries paying higher wages, lowering the wages in the latter while raising wages in the industries they leave. However, what students often fail to note is that economic theory predicts, not the equality of wages between jobs, but the equality of net benefits. A job brings people income (a wage). It might also bring other monetary benefits, such as bonuses for high sales figures, or a pension plan, or share options. These we call Pecuniary Benefits. But jobs also bring Non-Pecuniary effects, effects that affect a person’s experience of a job but are not paid in monetary form. These can be good or bad. When choosing whether to seek to enter a particular industry, a prospective worker may weigh up the Pecuniary and Non-Pecuniary aspects of the job as a package. A job is not necessarily desirable because it offers high pay: it might also be very unpleasant or demanding or dangerous, in which case the overall package may definitely NOT be appealing. Among these Non-Pecuniary aspects of a job are:

  • Convenience / flexibility of hours available. Jobs with unsociable hours will find it harder to attract staff so will need to pay higher wages than similar jobs in the day.
  • Status. Jobs with higher status will find it easier to attract staff at any given wage rate — e.g. university professors
  • Promotion prospects. Jobs with good promotion prospects will have more applicants at low wages, as people expect to advance through the system. E.g. working in the media — this might be low paid at first, but people hope to get better opportunities to earn money over time.
  • Qualifications required. The more qualifications required to do a job the lower will be the supply of labour. This is why teaching unions are so keen that people do a PGCE before they can teach.
  • Pleasantness of job. When jobs are unpleasant the supply of labour will, other things being equal, be less — e.g. working in an abattoir. By contrast the supply of labour to pleasant jobs — e.g. working for a charity caring for sick animals — will be higher and money wages accordingly lower.
  • Holidays. Long holidays will attract workers — e.g. teaching.
  • Training offered — jobs which offer training will attract more labour. This was how apprenticeships worked: a young person would receive a low wage, but they would be trained in the job and able then to gain a higher reward later.
  • Recent performance of firm / occupation. If a firm or industry is expanding and making good profits, more workers will want to work for it — e.g. computer programming.

In the light of the above, how are we to interpret the following graphs which recently appeared in the Wall Street Journal? Clearly the premium paid to factory workers over restaurant workers is steadily declining, as is the smaller premium over retail workers.

What can account for such a trend? Given our theory of net benefits, the fact that the payment to factory labour relative to shop and restaurant work has declined must mean that the unpleasant or irksome aspects of factory work have diminished, or that irksomeness or unpleasant aspects of retail and restaurant work have increased — or some combination of both. The extra money wage necessary to tempt a shop worker to become a factory worker has declined.

Is this plausible? It certainly seems likely that modern factory work is less demanding, dangerous or unpleasant than work in factories used to be. More heavy or repetitive work is automated, air quality has improved, health and safety standards are higher. At the same time, restaurant and shop work may have become less pleasant — more monitoring of staff by CCTV, less time to chat with customers, more repetitive tasks in large stores with regulated rest breaks. The following diagram provides some support for this.

As can be seen the service sector — retail, restaurants, hospitality — have the highest quit-rates, double those in manufacturing. People in those jobs clearly are restless and find themselves looking to move to other positions, and one factor is probably the hard and repetitive nature of much of this work which offers few opportunities for promotion and career progression. The fact that these industries also pay among the lowest wages suggests that relative wages in this sector have a way to rise yet — if the hospitality sector wishes to retain staff going forward it may need to pay them more and lower the differential with other sectors still more.

Of course net benefits are not the only factor explaining these differentials in wages since real-world labour markers are NOT perfectly competitive. There are numerous and very significant barriers to labour mobility. A shop worker cannot just become a factory worker — they may lack necessary skills and training and unions may limit entry; just as a factory worker cannot easily become an accountant or a lawyer. But over time in a free market economy relative wages should adjust as workers move between jobs in search of higher net benefits, and the declining premium for factory workers shows this might well be happening.

By Dr Ian StJohn

Passionate about using economics to understand the everyday https://www.facebook.com/Everyday-Economics-104573444978165