Monday, August 25, 2014

Need-Based vs. Value-Based Wages

I hear a lot of people advocating for a raise in the minimum wage (usually to $10 or $15 per hour) so that people can "make a living wage." Here is my response to that.

If you think we need a higher minimum wage to ensure that we take care of everyone's needs, you are advocating for wages to be paid based on need, not the value of their work. That sounds nice, but there are some serious problems with that view. For one, it's unfair. (Yes, I just used the code word of the liberals in favor of my conservative viewpoint. I love turning the tables like that.) Paying wages based on need is inherently and unavoidably unfair.

Let's use an example of two men doing exactly the same job at the same company. One is a married man with 3 children. The other is single with no children. Should the company pay the married man more than the single man, even though they do exactly the same work?

If you believe that people should be paid based on their need rather than the value of their work, then you must say that the married man should receive more pay for his work because his need is greater. Yet very few would agree that a married man should be paid more for the same work. We instinctively realize that it is unfair and unjust to pay two people differently for the same work.

Let’s go a bit further. If people should be paid based on their needs, then why not do away with a set wage altogether? Instead, employers should simply meet all the needs of all their employees in exchange for work. So, if an employee’s car breaks down, rather than pay for the repairs himself, he would turn in the bill to his employer. Likewise, all food bills, rent statements, utility bills, hospital bills, and all receipts for any need are paid or reimbursed by the employer in exchange for working at the company. That way, we can ensure that everyone can live on what they make. Of course, that also means that many employees will make much more than other people doing similar work. It also means that employees become, not masters of their own destiny, but more akin to slaves – being fed, housed, and clothed in exchange for working for the master. Is this what we want? It is if we think that wages should be based on need.

Instead of basing wages on need, a much better way is to base wages on the value of the work being done. In this view, a person who provides more value to the company should receive more pay while someone whose skills are less valuable receives less pay. This seems heartless on first glance, but actually has several advantages to both the company AND the worker.

The advantage to the company is obvious. Basing wages on the value of the work produces incentive for employees to do better quality work in order to receive better compensation. Plus, the burden of deciding what constitutes actual needs (as opposed to wants) is removed and the overhead involved in doling out welfare to all employees is gone. No one debates that paying for the value of the work is better for companies.

What many don’t realize is that a system where wages are based on the value of the work is actually better for employees.

For one thing, when compensation is based on need, it is nearly impossible to have anything more than the most basic needs met. No matter how hard you work in such a need-based system, you can’t get any more. The employer is only obligated to provide for your needs. If you want nicer things, you’re out of luck. No amount of harder work, increased skill, or better efficiency will get you more than the basics you need to survive.

What’s more, you can work your hardest and still get less than someone who doesn’t put in much effort, but has more need. This is tremendously disincentivizing and demoralizing. How can anyone have pride in their work when it doesn’t matter how hard they work? They will still get the same compensation as if they had barely done the minimum. And how depressing would it be to work very hard and have the guy at the next desk, who does practically nothing, getting the same or better than you. It’s simply not fair or right to pay different amounts for the same work or give the same pay for different amounts of work.

In a system where wages are based on the value of the work, a person can get ahead by working harder, developing new skills, or becoming more efficient. Their future is in their own hands. That is empowering. That gives people hope. It gives them reason to produce something of value that is useful to society because it is also useful to themselves personally.

Paying for the value of work rather than need gives people the opportunity to better themselves. It gives them incentive to do better and to have hope because they are masters of their own destiny, not slaves to a system.

A value-based system of wages is not only better for businesses and workers, but it is better for society as a whole. A society where everyone works to better themselves in order to provide more value, and thus earn a better wage, is a prosperous and thriving society. New inventions are made, new services offered, new businesses opened, new technology developed – all for the purpose of allowing individuals to better their lot in life. There is no incentive for developing these things in a need-based system. There is far more total production when everyone is working to provide more value in order to get more for themselves.

A system where people are paid based on need has no hope or future. A system where people are paid based on the value of their work is empowering to individuals and allows them to better themselves, provide for themselves and their families, and make their society more productive.

So, should we pay wages based on need or on the value of a person’s work? We can't have both.

If wages should be value-based, then we shouldn’t raise the minimum wage. We should allow individuals to be paid based on the value of their work. Those wishing to earn more must either work more hours or increase their skills. But they have that opportunity to decide for themselves and control their own destiny.

On the other hand, raising the minimum wage to a “living wage” simply means that those not providing enough value to be worth that minimum wage will have no jobs. It means cutting off hope for those of low skills who cannot make it into the job market. It means keeping a permanent underclass who have been priced out of jobs. It might sound compassionate to want to pay everyone enough to live on, but the results actually hurt those with poor job skills. And that isn’t good for anyone.


  1. What is the value of their work? How do you calculate that?

    Let's say a company pays off its fixed costs and variable costs (apart from labour) and has a certain amount left over. How much should then go to the owner-investor-manager, and how much should go to the worker? How can we decide such a question?

    There is a market for capital and also a market for labour. Surely the value of labour is determined in the labour market. On the other hand, some markets function more efficiently than others, and some markets get broken. Maybe the labour market in America has something wrong with it these days?

    1. In general, the value of a person's work is determined by the job market. It's roughly the going rate for that kind of labor. Of course, there are other factors that come into play as well. If a person does their job more efficiently or produces a better result than the typical person doing the job, their work has more value. That is why many companies give raises to individuals who work harder and do a better job, even if they don't move to a new position. That is also why people with more experience usually receive more pay. The assumption is that those with more experience work more efficiently and can handle a wider range of tasks, thus making their labor more valuable.

      Of course, this issue was not the focus of my post. I was merely contrasting two different ways of determining wages. The discussion of how to calculate the exact value of a person's work is a bit tangential.

    2. But you were arguing that a raise in the official minimum wage would be unfair because it would just be "based on need, not the value of their work." You seemed to assume that the value of the work was lower than $10 or $15 per hour. This assumption is at the core of your argument, not tangential. But you didn't address it.

    3. The value of some people's work is less than $10-15 per hour. These are the people the raise in minimum wage is designed to help. But these people are the ones who will be unemployed if we raise the minimum wage since they will be priced out of the job market.

      Other than that, the argument is based on a general rule that value-based wages are better than need-based wages for everyone. For people whose work is very valuable, that's pretty easy to understand. A person with valuable skills makes more than enough to meet their needs. Going to a need-based wage would result in them making less money. Where it's less obvious is when a need-based wage would be higher than a value-based wage. That's where you have to look at the bigger picture.

      Think of a need-based wage as a horizontal line for any particular individual. A value-based wage is a line with a positive slope. The lines cross at some positive value. Thus, there are certain places on the graph where a need-based wage is higher and other places where a value-based wage is higher. A need-based wage might look better for people with low skills that fall on the side of the graph where need-based wages are higher than value-based wages. However, need-based wages give no possibility of an increase in standard of living over time and give no incentive for bettering oneself or contributing more to society.

      Thus, even if the minimum wage raise works, giving need-based wages puts these low skill people in a rut to become perpetual low contributers to society with no hope of advancement and no pride in their work. People of more valuable skills have even less incentive to do good work when they receive the same pay as those who do far less. That is why socialism does not work. Without force of the government (and to a lesser degree, even with government force) you cannot make people work harder when they don't receive any more. Need-based wages make for a very inefficient and poor society across the board because there is no incentive to do more or try harder.

      And that scenario assumes all these people of low skills do actually keep jobs. In reality, that scenario won't happen in an economy like ours. What actually happens when you raise the minimum wage in an economy like ours is that people whose labor is worth significantly less than the minimum wage will not have a job at all. People who are worth just a little less will probably still have jobs, although the company will probably have to pay more skilled employees a little less than they normally would to make it up. But people who aren't close to the minimum wage will be unemployable because they don't offer enough value to the company to warrant hiring them. What's more, they can't get into the job market to increase their skills and experience in order to develop better skills so they may be perpetually unemployed and dependent on society rather than self-sufficient contributors.

      The minimum wage is a barrier to entering the job market. Until you have enough skills to be worth the minimum wage, you will be unemployable. The higher we set that bar, the fewer people that will be able to make it into the job market. The lower we set it, the easier it is for people to get a job. Once in the job market, the vast majority of people have the value of their skills increase and, with them, their wages.

      A minimum wage job isn't supposed to be a career that someone stays in for life. It's an entryway into the job market to let people get their feet wet, so to speak. It's a chance to develop valuable skills while getting paid and develop job experience and a resume that will allow individuals to get better jobs in the future. The higher we set the minimum wage, the harder we make it for people to enter the job market and start developing their skills.

  2. If people are paid according to their value to companies, folks digging diamonds and working in electronics factories should get paid more than ceos. But the opposite happens. The ceos make as much money as they can while paying their employees as little as possible. Without minimum wage, the workers will be slaves or just make pennies. Minimum wage at full time should be equivalent to the cost of living.
    New skills are hard to obtain when it costs a lot money to go to college and apprenticeships are hard to find. Some people work hard in their job and never get a raise. When employers are not required by law to pay good wages or give raises, they have little reason to do it. Some people have to work minimum wage jobs all their life because they cant afford college and never get a raise or promotion, despite working hard.

    When i worked as a tech support in apple, i was paid minimum wage. When i was promoted against my will to "senior advisor", i only made $1 more which was not enough to make me want to be promoted. My supervisors were paid on salary, and their salary was less than the hourly pay. It is debatable whether the supervisor position requires more skill. My friend worked retail at the hourly rate for a few years before being promoted to manager. And then he got paid by salary which came out to less than he would make hourly. So in these examples, the higher positions were not paid more. But many salary workers do get paid a lot, regardless of how many hours they put in. How is this fair?
    Retail and fast food jobs are called low skill, but these companies would not be in business without those workers. Those workers are under-appreciated. And when they are working full time or overtime and still can barely pay their rent, they are being underpaid. Many work hard but dont get promoted. Because there are limited higher positions available, but always a need for many low level employees.

    I think full time minimum wage should be the cost of living for a single person in their area. Maybe for workers who dont have bills and claim to be saving up for college or a house or a car, the employer could put half the money in a savings account in their name that they cant withdraw except for purchasing what they said they would purchase, or for use in emergencies. In one job I worked, i got a low monthly stipend less than minimum wage, but at the end of the work year, i got additional money that could only be spent on education like college expenses.