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Friday, April 14, 2023

So You Think You’re Being Underpaid? Compared to What?

Annoying as it may be, your labor is only worth what someone is willing to pay for it.

Image Credit: Composite image by FEE - Pixabay

What is your labor worth? If you ask most people, they’ll probably say it’s worth somewhat more than what they’re being paid.

Many people seem to regard their own profession as particularly undervalued—a completely coincidental observation, no doubt. If you ask a teacher, it just happens to be the case that they picked one of the professions that most exploits and underpays its workers. How dreadfully unlucky. And yet, if you ask a mechanic, they’ll say the same thing about mechanics. Ask a nurse, and they’ll tell you why it’s actually nurses who are some of the most abused of all workers. It’s as if everyone got the short end of the stick, and the long end doesn’t exist.

Funny how that happens.

Regardless of profession, the common gripe among workers is that they aren’t being paid a “fair wage” for the work they do. Their employer is ripping them off, they say, paying less than they deserve.

The question that ought to be immediately posed is this: how do you know what constitutes a fair wage? By what standard can you say you’re being underpaid? It’s not like there is a table of fair wages we can all consult. If only there were! Then one could simply look at the table. “Ah yes, there it is. Nurse in New York City in 2023. The table says a fair wage is $100,000 per year. I see you are only getting $85,000. Clearly, you are being underpaid.”

Since such a table has yet to be discovered, proponents of “fair wages” have had to resort to other arguments to justify their grievance. One argument is to simply assert that they are worth more, perhaps because they’ve gone through extensive training or have been on the job for many years. But this line of reasoning is unconvincing. If you aren’t creating value, training and experience aren’t worth much.

Conceding this point, some have developed a slightly different argument. “Workers in comparable jobs make more than us,” they say. “Thus, we should be making roughly as much as them. The fact that we are making less is evidence that we are being exploited.”

This is a better argument, because it actually specifies an approximate standard of fair pay, namely, the pay currently being received in a comparable job. Surely it’s reasonable to expect similar pay for similar work?

Yes…but. The critical assumption here is that the job being specified as the standard is in fact comparable to the job in question. But is it really? Well, that depends on whether comparable work is a meaningful concept in the first place.

The Value of Work

In the Equal Pay Act of 1963, Congress mandated that employers give men and women equal pay for equal work. “Equal work” in this context essentially means work with the same job description.

But in the decades following, some argued this didn’t go far enough. Specifically, they pointed out that male-dominated jobs often pay more than female-dominated jobs that carry similar demands. Thus, even though “equal pay for equal work” had already been achieved, many now wanted broader requirements mandating equal pay for “comparable” work, even if that work was in a completely different field. This came to be known as the comparable worth or pay equity position.

Historically, the debate over comparable worth emerged in the context of the gender pay gap debate, but the reasoning of comparable worth has also been applied in other contexts. In particular, some studies argue unionized workers earn more on average than “comparable” non-union workers, a phenomenon known as the union wage premium. To be fair, the jobs being compared in these studies are not nearly as disparate as those compared in the gender-based arguments. Even so, they are not identical jobs either, yet the implication is that non-unionized workers are providing the same value for less pay.

To determine which jobs should be considered equally valuable, comparable worth proponents have come up with a variety of criteria for evaluating jobs. For example, in a 1974 study commissioned by the state of Washington, the consulting firm Norman Willis & Associates used four criteria to classify jobs. These were: (1) Knowledge and Skills (job knowledge, interpersonal communication skills, coordinating skills), (2) Mental Demands (independent judgment, decision making, problem solving requirements), (3) Accountability (freedom to take action, nature of the job’s impact, size of the job’s impact), and (4) Working Conditions (physical efforts, hazards, discomfort, environmental conditions).

In her 1988 paper Comparable Worth: Theoretical Foundations, political scientist Ellen Frankel Paul discusses the methodology of the study. “Evaluation committees assessed job classifications on these four criteria and awarded points to each. Comparable jobs, then, were those that achieved approximately the same overall point scores. In this way, such disparate jobs as secretary, nurse, surveyor, highwayman, etc., could be compared. This methodology attempts to replace subjective and, hence, discriminatory market decisions with objective, nondiscriminatory assessments by trained evaluators.”

The problem with this approach, Paul points out, is that it rests on dubious philosophical foundations. Notably, her criticism applies just as much to comparisons of secretaries and surveyors as it does to comparisons of unionized carpenters and non-unionized carpenters.

“Comparable worth depends on an intrinsic value theory or an objective-value theory,” Paul writes. “It assumes that the worth of jobs to employers can be measured on an objective scale. If we leave aside, for the time being, the consideration of whether any given set of people can impartially implement such a system, the notions of intrinsic-value or objective value themselves are defective.”

As Paul goes on to discuss, many economic thinkers in the past held to theories of objective value such as the labor theory of value, which states that the price of commodities primarily depends on the amount of labor effort put into making them. This theory was advanced by the classical economists (such as Adam Smith) as well as Karl Marx and his followers. But as Paul notes, this way of thinking was discarded in the late nineteenth century in favor of the marginal utility theory, which—among other things—holds that value is subjective. The marginal utility theory explains real-world phenomena much better, and it is accepted by nearly all economists to this day.

What does this have to do with the topic at hand? Paul explains.

“Comparable worth shares with the labor theory of value a desire to discern some objective characteristic of worth or value apart from the valuations of actual buyers,” she writes. “For comparable worth it is no longer the hours of labor embodied in a thing which sets its value, but rather that the value of labor itself can be determined by assessing the knowledge and skills, mental demands, accountability, and working conditions that characterize each job. But there is no intrinsic value to any job. A job has value to someone who creates it and is willing to pay someone to do it. The price for that job is set by the market, which is nothing more than an arena for averaging the demands for labor of each particular kind by numerous employers.”

In short, comparable worth makes no sense because there is no such thing as intrinsic value. A job is worth what someone is willing to pay for it. Period.

“If jobs have no intrinsic worth,” Paul writes, “then the comparable worth position has been severely wounded, for it bases its case on precisely such an assumption. All commodities, labor included, are worth what buyers are willing to pay for them and what sellers are willing to take in order to part with them. Furthermore, if jobs have no intrinsic worth, they cannot be compared on any objective scale. In fact, we cannot even say that a plumber who makes $10 an hour is worth the same to his boss as a teacher who earns the same wage is worth to his employer. Such comparisons are vacuous.”

“The problem with comparable worth is similar to the problem of making interpersonal comparisons of utility,” Paul continues. “While each person can order his own preferences, these separate preference orders cannot be equated. Similarly, different jobs cannot be equated on any objective scale. Even the market cannot equate the worth of one job with another. Thus, any attempt to employ supposedly objective job-assessment criteria must be inherently discretionary; the judgments of bureaucrats would be forcibly substituted for the assessments of those who are the actual purchasers of labor services.”

“There is no intrinsic value to any job,” Paul concludes, “and hence they cannot be measured or compared.”

Reconsidering the Equal Pay Act

Not only does this analysis completely refute the comparable worth position, it also raises questions about the more mild arguments behind the Equal Pay Act. Sure, nurses can’t be equated with construction workers, but what about jobs that have the same job description? What about jobs which, to quote the Equal Pay Act, require “equal skill, effort, and responsibility, and which are performed under similar working conditions?” Surely that is equal work?

If we take our subjectivism seriously, the answer has to be “not necessarily.” Even if the job description is the same, the workplace is the same, the employer is the same, and the tools and equipment are the same, employers will still sometimes have preferences for one worker over another. Each worker brings a unique personality and skill set to the table, after all, and the value of these is completely subjective. And yes, they also bring their gender, which can set them apart from other candidates as either more valuable or less valuable if that’s something the employer cares about.

Ironically, then, the Equal Pay Act doesn’t actually mandate equal pay for equal work. Rather, it mandates that equal pay be given in precisely those situations where, because of gender, the employer considers two jobs to be not equal in worth.

We can criticize the employer for their discrimination all we want. But so long as they genuinely place a different value on two different workers because of their gender, there is no basis for saying those two workers are performing equal work.

Value Is Not the Same as Effort

If comparable work is such a flawed concept, why is it so widely endorsed? Perhaps the answer lies in the word comparison.

Though they would be loath to admit it, comparable work proponents seem to be driven by a subtle yet persistent envy. “Look at how much money plumbers make,” they might think to themselves. “I went through just as much school as them, and I work just as hard. Why should I be paid any less?”

It’s tempting to compare ourselves to others and complain when they earn more than we do for what seems like the same skill and effort. It’s completely understandable when people look at such situations and say, “It’s just not fair.”

But the market does not reward skill and effort. It rewards value creation, and the fact is some jobs create a lot more value than other, equally demanding jobs.

Now, we could spend our lives fighting this reality and striving to create a world where people are compensated for their effort rather than their value. But we could also choose to accept this reality and focus on finding ways to create more value with less effort ourselves, either in our current field or a completely different one.

I know which option I’m choosing.

This article was adapted from an issue of the FEE Daily email newsletter. Click here to sign up and get free-market news and analysis like this in your inbox every weekday.

  • Patrick Carroll is the Managing Editor at the Foundation for Economic Education.