Americanly Yours

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Why CEO’s Earn More Than Janitors

May 12, 2011 By: Phred Category: Uncategorized

You might wonder exactly why it is that janitors earn much less money than CEO’s. After all, in most circumstances, janitors engage in much more physical labor than do CEO’s, executives and managers, and even the average “white collar” worker.

Are the working class laborers being systematically exploited by managers and white collar workers? Is it the case that white collar workers are making money at the expense of blue collar workers, or is there a better explanation?


Value Does Not Come From Labor

If labor created value, then society (and all of its members) could get rich by having everyone use their bare hands to dig large holes in the desert and then fill them back up. After all, this would be extremely hard work of a very physical nature. However, this would create no wealth for society—in fact, it would represent a destruction of wealth (imagine what the laborers could have actually produced if they were not hired to complete this task).  Generally, this destruction of wealth takes place in the form of an absence of economic activity which would have otherwise occurred.

The value of a product does not come solely from the labor of the workers. The value of a product is measured subjectively; a product is essentially worth what people are willing to pay for it.

A laborer in turn receives payment for his services based on the value that his work adds to the product or service. A janitor in a shoe factory adds relatively little value to the shoes that are being created. There is likely more value being added by the designer who designs the shoes, by the worker who sews the shoes together, and by the person who manages the distribution network which allows for the shoes to be sold in thousands of stores around the world. These workers add more value to the product, despite the fact that the janitor undoubtedly exerts more physical effort to do his job.


While value added by workers is an important reason for the existence of disparities in income, scarcity tells much more of the story.

As Thomas Sowell put it, economics is the allocation of scarce resources which have alternative uses. With the exception of air, just about all resources are scarce. Similarly, nearly all resources have alternative uses (should this rubber be used to make tires or shoes?, should this glass be used to make a window or a beer bottle?, should my time be spent watching a movie or cleaning the house?).

Scarcity doesnt just mean that there isnt a lot of a certain good. Scarcity means that the good is limited. Even in America, bread is a scarce resource.

Diamonds and Water

Think of diamonds and water. Which of the two resources is absolutely essential to life, and which could we live without? Water is infinitely important: without water we will all die very quickly. Diamonds are nice and sparkly and women love them, but they are hardly essential to our lives. However, water is very cheap and diamonds are very expensive. This phenomenon is known as the “diamond/water” paradox. The reason for the differences in the costs of these goods is scarcity; water is abundant, while diamonds are scarce.

For example, I live in unincorporated DeKalb County [in Georgia] where my water is provided by a government monopoly (and hence is likely more expensive than would be the case under a free market system). Yet, the monthly bill for my 3 bedroom house has averaged $61.17 per month since April of 2007. In other words, over the past 4 years, it has cost about two dollars per day to provide the 2-3 people living in my house at various times with the most important resource that we need for survival. In fact, water is so cheap that I can do more than just use it for survival needs—I use it for showering, cooking, watering my plants, and even brewing beer.

What does this have to do with janitors and CEO’s?

Well, the same principles which lead to the diamond/water paradox also apply to compensation for labor. Please keep in mind that my intent is not to belittle the work that janitors do. I know that this type of work is physically demanding and dirty work. However, there is little skill involved and little intelligence required. The fact of the matter is that nearly every able-bodied person above the age of 13 or so is probably qualified to be a janitor. In contrast, there are only a very limited number of people who have the intelligence, experience, and ability necessary to be a successful CEO of Coca-Cola. Janitors are replaceable and easily trained. High-level executives are not. In other words, the pool of available janitors is relatively unscarce when compared to the pool of available CEO’s of Fortune 100 companies.

Bringing it all together

Disparities in income are hardly the result of exploitation by the white collar class against blue collar workers or the working poor. Compensation results from several factors including the value added by the worker, as well as the relative scarcity of the pool of workers available to fill that position.

There is no Federally mandated wage scale requiring certain salaries for certain types of workers. Decisions on how to pay employees—be they janitors, CEO’s, or something in between—are generally made on a company by company basis. Those in the position to hire janitors will pay them according to the value that they believe will be added to the firm. They will likely tend to pay the janitor at levels similar to that of other janitors in related fields. This is because a janitor is likely to add similar levels of value at which ever company he works. The range of compensation for CEO’s is very large, with CEO’s of smaller companies earning drastically less than do CEO’s at large multi-national firms. This is because of the differences in the amount of value that can be added by different CEO’s in different fields at different companies. The CEO of Wal-Mart is responsible for running a worldwide distribution network, ensuring that over a million employees get paid, and in a broader sense—ensuring that society is fed and clothed. In contrast, the CEO of a small but delicious pizza chain has responsibilities which are much greater than his employees, but which do not compare to that of the CEO of Wal-Mart.

Ceteris Peribus

This article does not deal with things like corporate welfare or other special privileges which are often received by corporations from the State. While special privileges will likely skew the distribution of income away from the bottom of the and towards the top, the principles at hand do not change. In a truly free society with no governmental grants of limited liability, no business licensing requirements, corporate welfare, and private control of the currency, income is likely to be somewhat more evenly distributed among the productive members of society. However, as long as there is any level of freedom of choice, there will always be disparities in income.  Income disparities are not always bad–in fact, they are very important.  Differences in income give us something to strive for.  If we all earned the same wages, no matter how hard we worked, no matter how much value we added to society, and no matter what type of work we did, no matter our ages, or no matter how much experience we had, there would be little reason for people to put much effort into their jobs.  There would be little incentive for anyone to be productive beyond the subsistence level–after all, any additional effort that they did would have to be shared equally with all of society.  If we were all the exact same, there would be no reason for trade, or even for society to exist.  It is our differences which encourage people to interact and trade with each other.  No society larger than a small tribe could survive for long if wages were distributed equally.

As long as there are people with different skills, levels of intelligence, backgrounds, lifestyles, and so on, there will be differences in income. People are different from each other, and as such, will seek out different goods and services. They will also find themselves qualified for different types of employment than their friends and neighbors. Typically, those who are employed in positions that create a lot of value and are relatively scarce will earn higher incomes than those who are employed in positions that create little value and are relatively common.

Americanly Yours,

Phred Barnet

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17 Comments to “Why CEO’s Earn More Than Janitors”

  1. Well put Phred! Great explanation.

  2. While you are assuredly correct in pointing out the untenable economics of Marxism, i.e., the folly of, “From each according to his ability, to each according to his need….”, please bear in mind that the system in place here in the West is not true free-trade capitalism as it would be in, say, a “black market.” To the contrary, what we have is a perversion of a free market, manipulated by interested parties.

  3. Jason–Thanks!

    Jack– You are 100% correct. I did mention that at the close of my article in the Ceterus Paribus section

  4. I really enjoyed reading this article along with the majority of your blog. Most of the ideology echoes my own only more delicately put than I could represent them. Thank you very much for the time and effort put into this, it does not go unnoticed. Enjoyed thoroughly! If you are interested my blog features some Libertarian ideas occasionally here

  5. Useful brushing up on Econ fundamentals for many of us, though more tersely, an allusion to supply and demand. Whether it be labor, diamonds, water, CEO-level brainpower/leadership/experience/charm/politicking is in very low supply. Janitorial skills; hands and a heartbeat, are in plenty supply. Yes, the market still works.

    My only gripe is with the headline: “Value does not come from Labor”. This is wholly incorrect. There are countless examples of manual labor, husbandry, which surely add value.

    There is no doubt that our country’s laborers are becoming more productive, attributed almost entirely to industrial and technological innovations. As a result, human physical labor has decreased in value, considerably. It’s not hard to see we have morphed from a blue collar nation – look at our automakers; a worker’s labor, while it is being phased out and adds far less value, still adds value (just not nearly at the worth that it once did, hence their bankruptcy).

    In nature, labor creates property. I pick strawberrys, assuming public land, that at one time belonged to everyone. My application of labor is an extension of me (because I and no one else owns me). By gathering strawberries, I have removed them from nature, applied labor, added value, and created property. Certainly my basket of strawberries is more valuable than pointing to a field in which they grow.

  6. Peter–You are correct and I should have been more clear about that point.

    I think I was clearer in the 2nd paragraph of that section when I wrote “The value of a product does not come solely from the labor of the workers. The value of a product is measured subjectively; a product is essentially worth what people are willing to pay for it.” The word “solely” is very important. While you are correct in the fact labor can create value, not all labor creates value (ie, my reference about digging and refilling holes), and value does not derive only from the amount or difficulty of the labor (ie, janitors vs. CEO’s).

  7. Phred, many thanks. Looking forward to your next write-up!

  8. No need to much intelligence or whathever when you are born in a family that can provide you access to education, Internet, culture etc… and then do not have to choose between janitoring stuff and kind of limited observer of society. Alone we can go faster… but toghether we can go further.

    Why should we have more money than others ! Why !

  9. No one thinks that a janitor should be paid the same as a CEO. Of course a highly educated person who is making executive decisions at a company is going to be paid more than the person who empties the trash. The problem lies in the fact that the janitor is not being paid a livable wage. The problem lies in the proportion. The question is: How much is enough? There was a time in this country when a man could work a wage job and provide for a family. Now both man and wife work and are barely keeping the lights on.

    No, the janitor does not deserve the CEO’s salary, but doesn’t he deserve more than $12,000? A person can not live with dignity on that small wage. This while the boss rakes in his millions.

    You talk about what a person adds to the product. Then take a bank teller for instance. The teller is an integral part of the running of the bank. So how can you justify the salary disparity there? shows an entry level bank teller in my area earns $17,900 a year, but the CEO of her bank most likely took millions in bailout money.

    I can tell from your writing style that you and I may find some common ground, but it won’t be this issue.

  10. Phred,

    Good post. I think one of the major issues in America is people grow up feeling entitled. There’s this mentality that, “I deserve to make it,” regardless of what I have or have not accomplished. It’s as if we’ve forgotten that this country was built by people who understood that in order to be successful they had to do the work themselves, and they had to do a good job. No one handed this country to us, and it’s never effective to be given liberty. It must be taken.

    I like your style and content on here, and I think you would probably like some of the stuff I’ve written in my blog. I would be very appreciative if you took a look at it. Here is one of my “flagship” articles, but I’m pretty happy with almost all of them. If you check it out and like what you see, I would love the opportunity to form a partnership of some kind, whether it’s just links on each other’s sites, or the opportunity to post on your site as an outside writer at some point.


    Paul Brown

  11. You claim that having no income disparity would disincentivize the workforce, but according to modern behavioral studies, this is only true for jobs that focus on physical labor. Skilled labor, from blogs to computer programming to CEOs, function at their highest when money is exactly enough to live comfortably. To put it more accurately, they work their best when money is not an issue – enough so that neither lack nor overabundance of wealth is a distraction.

    This pay grade is especially well suited to _people who love the work they do_. PURPOSE is the incentive, not PROFIT. As we move forward, we will see the decay of old business models, replaced by more competitive models that focus on the well-being of employees, with values and purpose as the primary motivators. The fact is, labor for the sake of personal profit is repugnant to normal humans, but they’ll hold their nose and do it anyways, since they don’t see much of a choice. Sociopaths are far better suited to the prevailing corporate structure. Contrary to “common sense”, our country’s CEO and politician jobs would be more productive and highly skilled if personal profit was removed as a potential motivation for gaining these positions.

    “Differences in income give us something to strive for.” This alone demonstrates that your ideas on human motivation are outdated. If profit is your purpose, you have already sold your soul. I don’t think you have. After all, you’re blogging for free. What’s your motivation for that?

    The times, they are a-changin’. Automation will almost entirely replace unskilled labor. A single human will be able to be more physically productive than ever before. Unemployment will rise to unheard of levels because production capability is so much higher than demand. Fifty years ago I would have railed against the attitudes of entitlement that have soaked into American mindspace, but in the near future the real cost of providing subsistence (food clothing housing) for everyone in our society will be so low, it will force us to rethink what entitlement means. We already destroy vast resources in terms of food and clothing in order to fulfill “market sustainability”. It’s the same reason our appliances are plastic pieces of crap designed to fail in under a decade.

    In our society, virtually any restaurant will give you a glass of water for free, if you only ask. With our governmental infrastructure, potable water is abundant. There is no physical obstacle to treating food and housing exactly the same. We can easily create an abundance of these things, compared to one hundred years ago, or even twenty. Now, if you go to a restaurant and ask for a free bottle of evian, they’ll probably laugh at you. Again, I would advocate treating food and housing the same. Filet mignon and four-bedroom homes, free to anyone, is a silly idea. But removing all fears of starvation and homelessness from the wealthiest country on earth, is not.

    This echoes some of your ideas on privatizing firefighters and police. I misquote: “While the services would likely be provided to everyone to some degree, there would be substantial benefits to paying a premium.” (Here’s the end, so let’s tie it back to the beginning:) It would be a popular fear from politicians and economists that huge numbers of people would quit their jobs and never go back to work, that they would lose all motivation to participate in the economy. This stems from the poor understanding of human motivation that I’ve already covered. No doubt there would be people that quit their jobs immediately and take an extended home vacation. And yes, there will be some who decide that simply living and socializing is enough for them. But when people are freed from their basic economic fears, strange things will begin to happen. People of all backgrounds will begin doing the work they love. Since financial gain will no longer be a requirement of survival, the arts will flourish like never before in America. Sole proprietors will spring up all over, as countless people begin to follow their dreams. They’ll know that if they spend months on a business they believe in, failure is still a viable option. They won’t be risking their whole financial future on an idea. New inventions and patents will come like a flood, as creativity and innovation are simply what some people love to do. The markets will crash; well, they will regardless of any changes. But skilled voluntary services such as Linux and Wikipedia will become the norm. Open source software is already a huge phenomenon, these changes would make it even more so. Eventually money itself would become an appendix of our culture, somewhat helpful but no longer necessary. That would be a good day.

    And if you’d like to deny that people are motivated to do what they’re passionate about regardless of the money involved, then shut down your blog or start charging for it. Then you’ll have a leg to stand on.

  12. To Jack, post #3:

    The folly of, “From each according to his ability” is inspired by the book of Acts. In fact, Marx drew his inspiration from Biblical accounts of the early Christian community.

    Now I understand that the will of holy Spirit is to live in harmony with all creation to the best of our ability, but it’s just not economically viable. That idea goes in the bin.

    Alternately, I realize the human spirit has been around much longer than money or our not-really-free market economy. And this economy, it’s just not spiritually viable… and… maybe that idea should go in the bin.

  13. Darren Kenworthy says:

    What if the CEO’s primary skill is convincing others (a corporate board, for example) that the CEO has scarce and valuable skills, and is creating value for the company? What if their next most important skill is convincing others to allow the CEO to take credit for work they didn’t really contribute to? Such a CEO might manage to be really well compensated without creating any real value. In fact, they might run a company into the ground, use their skill to make sure some other party takes the fall, and end up pocketing huge bonuses in the process.

  14. To Phred:

    Excellent article. It’s up on the wall at work.

    To Darren, post #14:

    Working backwards here…

    The person or persons that hire the CEO, and he is an employee, must make sure that they outline clear and measurable goals that the CEO must meet. These goals are specific to the CEO only. Thus, the CEO cannot “make sure some other party takes the fall” when failure occurs. Failure to meet these goals, which I assume are designed to add value to the company, should result in a proper response from those who hired the CEO (i.e., reprimand, demotion, termination, etc.). This is true for any employee, by the way. If those that hired the CEO agreed to some crazy post-employment compensation, then that’s their fault and not the CEO’s.

    If others allow the CEO to take credit for work they, in fact did, shame on that person. Why would someone allow that unless they felt there was some value to them? A question to you…Is the end result of the work, with or without proper credit, a value to the company?

    Your questions are an indictment of a group of individual’s actions or lack thereof. They are hardly an indictment of “wage disparity” or of capitalism itself

  15. “If labor created value, then society..” I beg to differ. The cost of all known materials, everything of intrinsic value relies on the cost of energy to dictate its true value. Be that mining, refining and processing metals, wood, oil, works of art you name it. Titanium for example would replace steel if energy costs dropped by a factor of 10. It is simply not worth the refining. Too much energy. Even if it would virtually never rust and replace an aging infrastructure for centuries. Not an option. Everything works like this- but the prices of energy have been so tightly controlled that they appear static, you can almost ignore the variable as it is almost a constant. To say that digging a hole and filling it back up is a waste is a flawed analogy but when work is performed for good purpose there is a positive outcome. The only person helped in that analogy is the makers of shovels 😉

  16. Income disparity is one thing, but when it is a 1000% difference in pay from a CEO to a retail clerk in the same corporation, then it’s not just disparity. It is simple GREED. Those who can’t do it legally, steal. Those who can steal legally, do! But then again, if people feel robbed, they can have a general strike – across the land, from every janitor and secretary to every mid-level manager and lowly junior VP! ouldn’t that bring the nation to a complete standstill for ohhh … a WEEK? That’d be enough time for profits to be lost and for those in control realize they CAN rig the system and steal, but then, the people can outmaneuver them … IF they only would!


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