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To: gpowell who wrote (199)	4/25/2003 2:11:10 PM
From: Don Lloyd	Read Replies (2) \| Respond to of 445

gpowell, Excellent! All of your points will contribute to the final answer, but I don't think we've explicitly reached the depth of the puzzle itself yet. The issue is not just that the wages for similar jobs and employees vary, but that they would still show even a three to one variation, for instance, for the SAME employee, fully understood, in the same locality, in different companies. Even assuming that the employee will choose working over not working at either wage. Assume two companies located next door to one another that share a half empty parking lot. One makes 1000 diamond rings per year selling for $10K apiece for a total annual revenue of $10M. The other makes 1M plastic toy rings per year selling for $1.00 each in coin operated machines for a total annual revenue of $1M. The diamond ring maker has a 90% profit margin and the plastic ring maker barely breaks even. Both companies use one ounce of copper in every ring and employ a back room secretary to type letters and fill out shipping forms, etc. The secretaries are cousins and either one could fill either day to day job equally well. Copper has a market price of 5 cents per ounce. The diamond ring maker pays its secretary $30K per year as compared to the $10K per year for the plastic ring maker. Of all the companies that use copper and employ secretaries, the plastic ring maker is the last source of marginal demand and sets the market prices from the demand side. If it had to pay more for either copper or the secretary, it would go out of business and the market prices of both would rise at least incrementally. Why does the diamond ring maker pay the same for copper and 3 times as much for the secretary? The diamond ring maker can certainly afford to pay much more for both the secretary and the copper because of its much higher revenues and profits that are gated by the availability of both of the production factors. However, the diamond ring company could increase its profits by $20,000 by only matching the wage of the other company. Why does it not do so? Let me stop there so as to not prejudice your thoughts. Regards, Don