Why CEO’s Earn More Than Janitors
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.
Scarcity
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
Please help me promote my site:
Bravo. Exemplary.
1Well put Phred! Great explanation.
2While 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.
3Jason–Thanks!
Jack– You are 100% correct. I did mention that at the close of my article in the Ceterus Paribus section
4I 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 http://www.itutorblog.com/2011/05/the-future-of-libertarian-politics-better-resolution/
5Useful 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.
6Peter–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).
7Phred, many thanks. Looking forward to your next write-up!
8Phred,
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, http://paulmbrown.blogspot.com/2011/05/capitalist-manifesto.html 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.
Thanks,
Paul Brown
9To 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.
10What 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.
11To Phred:
Excellent article. It’s up on the wall at work.
To Darren, post #11:
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
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