You are toiling at your minimum wage job when you hear your boss talking about making only $5 an hour when he was starting out in 1980. You think to yourself, “Wait a second, I’m not falling for that! I know about inflation.” You quickly search an inflation calculator and see that the same wage today would be $15 per hour. You walk away convinced you deserve $15 per hour. After all, your boss made that much in 1980!
You were smart to consider the effects of inflation, but here there is more than meets the eye.
While the inflation calculator shows there has been inflation, it cannot show you that the value of goods, services, and labor do not necessarily rise at the same rate as inflation. Because of shifts in supply and demand, these values show substantial variability relative to the inflation rate over time. These factors, like costs, efficiency, and subjective value added, mean you can’t simply adjust your boss’s starting wage from 1980 for inflation and claim you are owed the inflation-adjusted amount. If you applied that thinking to the average television set, you would expect to pay over $1,000 for the set today. Instead, the inflation-adjusted price of TVs has drastically fallen since 1980.
In fact, the cost of household goods has fallen by as much as 95 percent during this time. This means that today, you can buy far more goods for fewer hours of work than you could in 1980.
The Costs and Value
You may think the television has nothing to do with stagnant wages, but consider this: the cost of the TV decreased over time, and so did the cost of doing your job.
Think about a simple office internship that hasn’t changed much over the years. “The work is virtually the same,” you think, “and you produce the same product as your boss did when he was an intern.” But tasks that you can do in under a minute today may have taken hours in 1980.
Today, the internet puts virtually all of human knowledge at one’s fingertips for instantaneous answers. In 1980, it took tabbing through file folders, visiting a library, or talking to actual people to find the same information. And producing a document now is hardly a task, whereas dealing with a typewriter or early word processor required more focus and time to manage the content and formatting. Both the effort and the cost to produce the same outcome today are far lower than they were in 1980.
It is likely that the value of that task is now lower because more people are capable of doing it more quickly and at a lower cost.
All these developments have made interns more efficient and able to achieve more, and surely that should lead to a higher wage. But this argument still misses the mark. If you can complete a task more quickly and more easily now, it means others can, too. It is likely that the value of that task is now lower because more people are capable of doing it more quickly and at a lower cost. In terms of supply and demand, an increasing supply of workers who can do a job leads to a lower price for labor. If almost anyone can do the job, the employer doesn’t have to pay a high wage to attract more skilled employees.
If you could buy the same product almost anywhere, you wouldn’t pay a higher price at one place. The same holds true for minimum wage jobs; since you are one of the many near-identical options an employer could hire, they won’t pay a higher price for your labor.
The same cost and value principles apply in many industries. Innovation has simply lowered the cost of doing many things. Even fast food has many factors leading to low costs, prices, and relative value. Everything from agricultural advancements that increase crop yields to streamlined supply chains connecting suppliers and producers more efficiently means that input costs for foods like the McDouble are lower today than they may have been 30 years ago. Factors like automation, advanced appliances, and competition ensure that producing fast food is cheap and abundant.
Consequently, the value of those items and the labor that produces them are relatively low. Many of these factors have decreased the actual value of the product or labor over time, meaning that even as currency inflates, the underlying value of the good or service moves in the opposite direction. This means that the inflation-adjusted price of a burger probably does not reflect its real value because the real value of the burger today is probably not exactly the same as it was in 1980. And so it is with the wage for the fry cook.
What Exactly Is a Wage?
Despite the seemingly intuitive idea, wages are not based on how hard you work. Wages are based on the value created by your work, which usually requires a certain set of skills, as well. This is why a college student doing backbreaking labor cutting tree limbs outside a business can make $7 per hour while his friend inside makes $20 per hour looking over spreadsheets.
The physical labor is more intensive, and the tree trimmer works harder, but trimming the trees only adds a little value to the company in curb appeal. Further, that tree trimming takes little skill, and anyone could be hired to do it. The student looking over spreadsheets never breaks a sweat, but he could be securing a corporate deal or ensuring compliance to prevent an audit. If you don’t generate more than $15 for each hour of your work, then paying you that much would mean the business is losing money. The spreadsheet student likely brings in more money for the company and is therefore valued more highly. He brings financial knowledge and an eye for detail that requires more skill, helping him earn a higher wage because the business cannot hire just anyone.
Looking at the employee’s actual work, we come back to efficiency and value. A wage is determined by producing enough value to offset the cost of your paycheck to the employer. If you don’t generate more than $15 for each hour of your work, then paying you that much would mean the business is losing money. This is even true for billion-dollar corporations. Of course Walmart has earned enough profit over the years to pay its employees a bit more, but on an individual level, if those employees are not bringing in more than they’re paid, Walmart will eventually lose its ability to bring low-cost goods to millions of low-income families or to employ as many people as it does.
Your Wage Is Different Than Your Boss’s Was
You want the same adjusted wages as your boss, but comparing wages over time is complicated. Even for jobs that remain essentially the same over time, there are changes in cost, efficiency, and ultimately value produced. The inflation calculator adjusts the value of the dollar, but this is only one piece of the puzzle and does not necessarily reflect real value. Value is subjective, established by the demand people place on something. It is determined at a given time and in a particular context. Society and the markets may simply value the same work or product differently in a different period.
It is certainly true that many people earn wages far lower than the value they create for their employer. If that is the case, those individuals have reason to ask for a raise if they can demonstrate their value to the company. For those who do not bring in enough value to the business to justify their cost to their employer, the solution is not to blame the minimum wage or inflation but to produce more value. It’s not an attractive solution, but it’s a necessary one. If you’re not happy with your pay, you’re not at the mercy of inflation; you are at the mercy of your own skills, work ethic, and value you can create. And it doesn’t necessarily mean working harder, but maybe smarter. It could be a creative solution that saves the company money, a new product placement or marketing idea, or just killer customer service that keeps people coming back and spending money.
One thing is clear: No matter what inflation does, wages are determined by the value an employee adds. Instead of dwelling on the wage your boss made in a different era, think about the value you bring to the company. If you’re not happy with your pay, you’re not at the mercy of inflation; you are at the mercy of your own skills, work ethic, and value you can create.