I thought people in SV are paid what they're paid because they're uniquely qualified and productive, making their employers extremely profitable, or salable.
Is that no longer true when they don't sit in a SV chair?
Is that no longer true when they don't sit in a SV chair?
I’m not sure if your comment was sarcastic or not, but this is an extremely common misunderstanding. It often comes up when people discuss CEO salaries (“do they really work YYY times harder than entry level staff?”, as if people are paid based on how hard they work).
I think the word “absurd” is an inappropriate description, which is just the company behaving rationally.
> just like everything else the price of their labor shouldn't be based on the cost to produce it
This is another misunderstanding. Nothings price is fundamentally based on the cost to produce it — that only happens for commodities in competitive markets. The cost of labor is based on supply & demand. And that’s different today in different places.
Vice versa a business that paid someone $8000 to get $800 worth of value might be able to sustain it (it can divert $7200 from something else) but won't be able to scale it.
People who want to sound reasonable might talk about figures like $790 and $810 but that guarantees you will be in the weeds because you never know exactly where to "charge" things. For instance, a firm invests in equipment for a worker, worker B fills in the gap when worker A slacks off, etc. Even in areas where it is widely believed you can measure productivity (e.g. sales) this is problematic.
I have been looking in the macroeconomics literature but haven't yet found any exploration of the following:
what if an organization has a nodal structure such that at each node somebody can divert X% (say 1 for the hell of it) of what goes through the node? The salary of the top man is then basically proportional to the size of the node, so to get mega-rich, a bank president in New York might buy a bank in New Jersey. The node in New Jersey remains, but a buyer of the bank in New York now gets to skim additional cream.
A corollary of that could be that the "competitive advantage" of "productive" urban areas is in theft. In Ancien Regime France you would set up at Versailles because that is where you had connections for thieving. In post-2008 America, Washington D.C. has boomed because it has "comparative advantage" if you want to bribe politicians to help you steal. Certainly in a country like Equatorial Guinea you are going to settle in the capital because that's where you can steal.
This is basically how the world works, if you consider each of those nodes a business. The cost to buy that bank though, already factors in the income stream that you’d get from it. Like how you can go buy shares on the public market and receive dividends.
Cost of living has nothing to do with it. The density of employers (and capital) in the valley plus a desire to hire locally leads to high compensation. This leads to engineers moving to the valley. The high density of high earners and demand for housing is what is responsible for the high cost of living in the Bay Area, not the other way around (high costs of living leading to high compensation).
Compensation is determined by the local cost of labor: if a competing candidate is living in North Dakota and willing to accept 30% less, then that's what they'll pay.