Pitching In

by Will Wilkinson on March 10, 2009

I tend to agree with Don Boudreaux about almost everything, but I think one bit of this recent letter to the editor is misleading:

First, in market economies incomes aren’t “distributed”; they’re produced and earned.  Second, persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs; the fact that someone’s income rises means that he or she already is pitching in more.  Third, the share of federal individual income-tax revenues paid by America’s top one-percent of income earners has recently been on the rise.  In 2006 (the latest year for which data are available) this tiny group of Americans paid a whopping – and all-time high – 39.9 percent of such taxes.

The first point is right on, as is the third. But the first half of the second point attributes intention where it should not, and the second half of the second point fallaciously infers a kind of increased effort from increased productivity. Let’s look at it closer:

… persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs

Holding demand and hours worked equal, increased inequality in earnings in wages tends to imply increased inequality in productivity. But a worker may become more productive due to some innovation in a technology that complements his or her skills without having done anything to increase his or her productivity.  

… the fact that someone’s income rises means that he or she already is pitching in more. 

If the rise comes from an increase in hours worked, sure. But trends in increasing wage and income inequality are primarily a matter of supply and demand. If demand for a certain set of skills goes up relative to supply, the wages of workers with that set of skills tends to go up. The fact that engineers are paid more than gardeners mostly has to do with the fact that engineers are relatively scarce compared to engineering opportunities, while gardeners are relatively plentiful compared to gardening opportunities. Wage and income levels are a pretty poor index of the social value of work, so an increase in an individual’s income neither suggests an increase in effort nor an increase of the value of the individual’s type of work. What it means is that, for whatever reason, that person’s skills happen to command an increasingly high wage on the market. 

The idea that income tracks virtue, effort, or merit–anything other than supply and demand–is a myth that I think Hayek pretty well exploded. I think it hurts more than it helps to suggest that the emergent pattern of incomes somehow reflects who is and who isn’t pitching in, since it doesn’t. For my money, Don is the world’s best economic fallacy exposer, so consider this a tribute to Don.

  • It's not the effort that matters, it's what is produced.

    Exactly.

    I think Will injected the notion of moral desert into this where Don hadn't intended it. I think "Pitching In" more means producing more; not necessarily deserving more credit or being more virtuous, or whatever.
  • Roger Avalos
    Will, you said:
    "restrictions on skilled immigration increase the wages of local skilled workers. The work of locals may become more economically valuable, due to the forced scarcity caused by stingy visa rationing, but that doesn't mean they're "pitching in more" in the sense of value to society."

    You are saying that in this case the locals are not adding more total value to society, which is true. However, the marginal value of what they do produce is higher (demand curves slop downward because of diminishing marginal utility). The restrictions are not inefficient because of the higher wages, it is the lost production from the labor restrictions.

    You also said:
    "I know a number of academics who used a job offer from another department to get a hefty raise. I also know a number who are too guileless to ever play this game."

    These negotiations happen because markets, and academic markets in particular, are not perfectly competitive. This is because of transaction costs, asymmetric information etc. These all create deviations from wages equaling marginal productivity, but do not change the that wages are being pulled towards that marginal productivity. Also, not all academics have the same productivity. Being a less productive worker, I may have a hard time finding the guile within me to seek an outside offer.

    "But a worker may become more productive due to some innovation in a technology that complements his or her skills without having done anything to increase his or her productivity."

    First, they did do something to increase their productivity: they started using the new technology. Second, if a worker doesn't "do" anything to become more productive, but they are more productive, who cares? It's not the effort that matters, it's what is produced.
  • uknowbetter
    "But a worker may become more productive due to some innovation in a technology that complements his or her skills without having done anything to increase his or her productivity. "

    The 'without having done anything' is wrong. The worker has to learn, adapt to, or in some other way integrate that technology into their work-flow. Adapting to new technology is a large part of being productive.
  • Vangel
    "The idea that income tracks virtue, effort, or merit–anything other than supply and demand–is a myth that I think Hayek pretty well exploded. I think it hurts more than it helps to suggest that the emergent pattern of incomes somehow reflects who is and who isn’t pitching in, since it doesn’t. For my money, Don is the world’s best economic fallacy exposer, so consider this a tribute to Don."

    What is missing is the fact that sometimes it takes a long time, hard work and discipline to increase supply. We know that it is far easier to become a competent gardener than it is to become a competent engineer. This means that it will always be easier to replace a garder than it is to replace an engineer and the market provides us with a wage level that depends on how hard we are to replace. This is why that over time the average engineer will always be paid more than the average gardener and why a 250 lb linebacker who can run a 4.5 second 40-yard dash, can move well laterally and explode to the ball is going to be worth a lot more than a decent nurse, engineer, or economics professor.
  • "But a worker may become more productive due to some innovation in a technology that complements his or her skills without having done anything to increase his or her productivity."

    People don't accumulate skills in a vacuum. They try to anticipate future demand for skills when they make decisions about what skills to acquire. So Boudreaux is right, there's intention and increased effort being rewarded by the market.

    Personally, I think this process of intentional skill accumulation is important. A worker might trade years in a lower paid job to accumulate skills he hopes will be valuable in the future. If his bet pays off, he's rewarded with a higher wage, but notice what happens to the dispersion of wages in aggregate.
  • Agreed. I also want people to follow the price signals and train for the jobs that pay. But I still think it's wrong to imply that in general wages track how much you've pitched in.

    I know a number of academics who used a job offer from another department to get a hefty raise. I also know a number who are too guileless to ever play this game. The income differential between these classes is sizable, but has nothing to do with productivity. (It has something to do with effort, but not productivity!) There is just way too much of this kind of thing in the system to say that income levels are even a rough proxy for pitching-in-ness.
  • Max Marty
    "... I still think it's wrong to imply that in general wages track how much you've pitched in. "

    I have to agree with Don on this one, though I'd add that the degree to which it tracks "pitching-in-ness" is directly proportional to the degree to which there is a free market in and surrounding that person's particular labor input. In other words, in your example of the local versus the immigrant denied a visa, it tracks it poorly. In other cases where there are fewer restrictions on labor, it will track it better.

    If there was a brain-surgeon convention in L.A., and 95% of all brain surgeons attended, and then that convention was bombed: each remaining brain surgeon would suddenly be pitching-in more (that is, creating more value per person) even IF they don't work one single minute more per day. Part of it is because those people consuming their services will be paying much more, and so those consuming their services at that higher rate will, all else equal, be those who for whom brain surgeries were most desperately needed, they will be those with the highest marginal utility to be gained from the brain surgeons services.

    That is, unless "pitching-in-ness" is something besides a euphemism for "measuring how much other people value x". If government artificially creates greater scarcity for some kind of labor, then you're tracking artificially made up make-believe value.
  • Hey, he wrote "generally", so I think he's safe.

    The price of labor (and anything else) does correlate, somewhat, with the value of that labor (or anything else). Of course it's not perfect, and of course it's affected by events beyond the control of the seller.

    But, it seems trivially true that people are generally willing to pay more for things that are more valuable to them (given the current state of the world, the supply of alternatives, etc.). Including labor.

    Of course there is luck, and imperfect information, and stupid trends, etc. But, I think the basic point still stands. Generally, people have earned more because they have already contributed more, according to those who have traded with them.
  • I don't think the basic point stands. People have earned more because the people who paid them were willing to pay more. That's all you can say.
  • Dan
    From an Austrian standpoint--which is where I think Don is coming from--the fact that a person is willing to pay more means that the labor is worth more to society. Austrians tend to believe that there is no objective value of a good; values are all subjective, so the only way to know the value of a good is by two parties voluntarily agreeing upon a price. That agreed upon price reflects the "social value."
  • I think one major issue with this approach is that the value of the good is only representative of one member of society (who might likely be the most desperate/irrational/dumbest person wanting to make that transaction.) It only works well for perfectly fungible commodities, which the labor market mostly isn't - especially at its extremes. And the idea that the highest earners make the greatest contribution to society would have to include the most extreme cases.

    Case in point, Dan Snyder thought Brandon Lloyd was worth $30 million. No same owner or fan would have agreed. And you'd be hard pressed to argue that a severely under-performing, highly paid free agent contributes more than his lesser paid peers, let alone than all those lower paid members of society who have jobs that contribute value to said society.
  • Well, then what does more social value mean, if not what people are willing to pay more for?
  • Incomes are also negotiated, and they are negotiated under conditions of power and information asymmetries. For example, an employer may know more about how much an employee is "pitching in" and keep that information from the employee as a means to keep the employee from demanding his or her worth. Alternatively, an employee may know exactly how much they are worth (i.e., how much they contributes to the companies overall production), know that they are not compensated in proportion, but also know that they are in no position to make an ultimatum. On the other hand, unionization may give power to employees over management such that there's an opposite effect.

    Maybe this is what you're getting at in denying (2), but it seems also to apply to (1). Also, (3) seems to me to be a somewhat misleading point if its not put in the context of the sharp increase in income inequality over the past several years. That is, if the top 1% are controlling a greater share of the wealth then one would expect their share of the tax burden to go up proportionally.

    Of course, this is all amateur speculation on my part and I don't have any references to econ lit to back it up. It does seem commonsensical though.
  • Dan
    "Wage and income levels are a pretty poor index of the social value of work"

    I'd like to see you flesh this claim out a bit. Why would we bother letting labor markets determine wages if that were true?

    I think when Don says "pitching in," he doesn't necessarily mean greater effort. I think he means that they are providing more value to society; therefore, taxing them at higher rates in order to extract their "fair share" is spurious. Don is saying that they've already provided their fair share to society, based on the value of their labor as determined by voluntary exchange. Of course, if wages are a "poor index of the social value of work," then Don's argument is blown out of the water.
  • Vangel
    Value is subjective so we can't really talk all that about it except by looking at the market price that measures that value.
  • Don will be the first to tell you that restrictions on skilled immigration increase the wages of local skilled workers. The work of locals may become more economically valuable, due to the forced scarcity caused by stingy visa rationing, but that doesn't mean they're "pitching in more" in the sense of value to society. They're just being paid more than they would be in a more competitive labor market. The social value of labor doesn't go up just because there's an indirect subsidy that increases the wage.
  • Dan
    Will,

    Fair point--many government interventions distort labor markets. Surely, though, Don was referring, in general, to wages earned in a relatively free market. More wage gains are earned through increases in productivity than from rent-seeking, right? Hopefully?
  • Yeah but that doesn't mean that income doesn't track merit at all. Wages for a job could go up because the supply shrinks due to dumb immigration laws, but wages could also go up because demand rises when people want those services more. Isn't that social value?
  • Paul_G_Brown
    Supply of labor goes up and down. Demand for labor goes up and down. Wages go up and down.

    You can be the best buggy whip maker or steam locomotive engineer or flogisten theorist or marxist historian in the world. Your income has everything to do with the proportion of the overall market demand you can meet with your capacity to supply. This 'social utility' thing is a chimera. It doesn't exist.
  • Paul_G_Brown
    I'm sorry Will, but I find the whole idea of the social value of labor mildly preposterous. What is 'social value'? In what units is it expressed? By what mechanism is it measured?

    Labor has economic value only. Everything else we do with our time is leisure.

    You start wandering off down that path, and you quickly find yourself in the Swamp of Subjective Judgement, beset on all sides by the Alligators of Utopian Thinking, and pestered by the Mosquitos of Collectivism.
  • Perhaps I spent too much time in Washington, DC and saw how much lobbyists are paid to help their clients steal money from taxpayers. And perhaps I met too many lawyers paid extravagant amounts to help negotiate the regulatory structure. In both cases, I'd say the lobbyists and lawyers are engaged in fundamentally unproductive work, but they sure do make a lot of money.
  • But, the regulations are real impediments to productivity, and negotiating them helps produce real gains in productivity. If that's a rare and difficult skill, why isn't it highly productive to do it?
  • Oh, maybe I misinterpreted "negotiate". I thought you meant that they helped businesses navigate through the regulations as cheaply and effectively as possible. Not to create them.
  • Paul_G_Brown
    Isn't this the same thing?
  • Dan
    No. Established companies can just as easily influence regulatory structures so as to impede new competitors from entering the market. This is one of the most nefarious aspects of "antitrust" enforcement. Witness the battles between Microsoft and Google.
  • "Labor has economic value only."

    I suppose the obvious question is: How did all those Wall Street bankers earn millions by losing billions?

    The banks probably could have hired rabid chimps as CEOs and done better for much less money.
  • Paul_G_Brown
    The banks probably could have hired rabid chimps as CEOs and done better for much less money.

    Well obviously the problem was government interference in the market for CEO labor.

    Edit to Add: Of course, we are overlooking the possibility of an extreme shortage in the supply of rabid chimps ....
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