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Pastimes : Austrian Economics, a lens on everyday reality -- Ignore unavailable to you. Want to Upgrade?

To: gpowell who wrote (234)	5/13/2003 12:39:32 AM
From: Don Lloyd	Respond to of 445

gpowell, I'm quoting your entire post here since I was unable to access it except as a reply presumably due to system maintainence problems. I understand your point and I don’t necessarily disagree with it. I’m just not sure what new insight it offers; regardless of the extent it reflects reality. An individual’s productivity is highly variable. One of the benefits of the specialization and aggregation of labor is it lowers the risk of endogenous and exogenous productivity shocks at the scale of the individual laborer. And while it benefits the laborer, it’s been demonstrated that this arrangement has benefits to the firm as well. Therefore, at the scale of one job and one laborer, one could expect a weak correlation between wages and measures of productivity. <<But the premium is determined completely from bidding process between potential employers for the highest ranked candidate, and leaves the candidate only to take the highest offer.>> Yet – no one is forced to take an offer. The premium could just as easily come from the demands of the employee candidate. If no one wants to accept a bid then an employer has a couple of options – pay the higher wage and incrementally raise prices, eliminate the job function through other means, or relocate the job function. Which it chooses to do is depend on the firm’s micro and macro state. With regard to just the bold part, I now see how I can incorporate this. In trying to explain premium wages for the same and similar employees, I am saying that companies are bidding up wages to obtain higher ranked employees who possess intangibles that the company interviewer perceives will be of future value to the company. This is not just a variation in perception, but will usually reflect a wide discrepancy in the utility of a given employee to one company over another company. This mechanism produces a wage level that is necessary to hire a highest ranked employee, but it is not necessarily sufficient. As you imply, the highest ranked employee may be cognizant of his higher intangible value to a given company and drive the actual premium wage even higher. Regards, Don

To: gpowell who wrote (234)	5/13/2003 1:08:58 AM
From: Don Lloyd	Respond to of 445

gpowell, The following is the basic part of a contrived example which I am using to think about both premium wages and how productivity figures into wages. I am leaving out the analysis to allow you to have an unbiased reaction -- Assume a tropical island whose inhabitants consist entirely of 4 mass market fiction writers, A, B, C, and D, and 3 possible employable assistants, X, Y, and Z. Each of the writers works for a total of 5 1/2 hours per day and transmits their work to their publisher in NY electronically. Writers A, B, C, and D earn $5M, $500K, $50K and $5K per year respectively, as the public enthusiasm for their books varies widely. Each author actually writes for 5 hours per day and expends an additional 1/2 hour making coffee and sharpening his pencils. It is this additional 1/2 hour per day that can be shifted onto an employed assistant, allowing the author to write a total of 5 1/2 hours per day, increasing his salable output by 10%. For simplicity, assume that a given assistant can only serve a single employer. Making simplifying assumptions that each author is indifferent to whether his momentary work is writing, making coffee, or sharpening pencils, and that he will continue to work a total of 5 1/2 hours per day instead of taking more leisure, we need to determine the value of an assistant for each of the 4 authors. We will assume that a given author will hire a given assistant if and only if the wage paid is no greater than the value the assistant represents. Since each author will write and earn an additional 10% when aided by an assistant, the annual additional net value of an assistant is $500K, $50K, $5K, and $500 for writers A, B, C, and D respectively, less the actual wage paid. Since there are only 3 assistants available to serve 4 authors, a market wage must be high enough to reduce the demand for assistants to match the supply. This is accomplished by an annual wage of $501, pricing author D out of the market. Regards, Don