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Comment by throwaway_xl5 | Hacker News Reader

The employer will want to pay the least they can to get the job done. This means you will likely get paid an amount less than the value you create for others. There are a lot of cases where you may choose to work for 7/h even though 8/h is on offer elsewhere such as a shorter commute, better hours, or nicer work environment.

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"There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible."

-- Henry Ford

http://www.brainyquote.com/quotes/quotes/h/henryford151869.h...

How do you explain Walmart (low quality goods, at the lowest cost possible, while paying the lowest wages possible, going so far as to show your employees how to use government benefits programs because you don't pay enough)?

Why would an employee work for less than the value they are creating? Seems like irrationally altruistic behavior on their part, or, alternatively, a marketplace in which the employers are not competing for employees (which has been known to happen in Silicon Valley).

In general, though - employees who are making less than the value they are creating, will simply be hired by another employer who can profit on that gap. This process repeats itself until the employee has reached the level at which they are making roughly what their value contribution is.

e.g. If you have a lawyer who bills out at $500K/year, and is only making $50K/year at Law Firm #1, they will quickly go to a law firm #2 that will hire them for $100K a year, and which will then profit $400K/year from their activity. That lawyer will likely find another job soon at Law Firm #3, where they will make $150K/year, and so on.

The primary reason in a neoclassical model would be a lack of perfect information, wouldn't it.

An employee may work for less than the value they are creating when - not being omniscient - they are unable to correctly value their work.

That's the best response in this thread, and I think the most correct.

Look at the profit per employee at firms such as Google, Apple, Facebook, and Microsoft. There are a whole lot of people being paid less than the value they create. (Remember, this is profit after expenses and salaries and such)

http://www.buzzfeed.com/peterlauria/what-18-of-the-biggest-t...

That's based on the assumption that only employee labor creates value.

There are lots of reasonable reasons to work for less than the value you create.

- First, you can never actually reach 100% while working for someone else. If you reached 100%, then the employer would look at you and say "I can make exactly the same amount of money if I employ this person or not. Why should I do it? There is absolutely no benefit to me."

- You might want to work on a certain problem with a certain team. For example, let's say I want to work on the next Pixar movie, with the Pixar team. There's no employer other than Pixar that can offer that to me. They can pay me less than I contribute, the only thing they need to guard against is mass defection.

- Switching costs. If I am earning 98% of what I would like, switching companies might be not be worth the extra effort.

- Other intangibles. Unlike what some economists would like you to believe, not everything of value can be reduced to a single unit (money) and rational decisions derived from that. Things might be of value to me or my employer that aren't included in the value that I create or my salary. These things don't necessarily behave linearly.

> Why would an employee work for less than the value they are creating?

Because if the employee worked for greater than or equal to the value they created, the expected return on hiring them would be less than or equal to zero, and nobody would choose to hire them.

I understand why employers won't pay employees more than the value they create - my question was the opposite direction. Why (outside of a monopolistic or otherwise non competitive market) would an employee who is delivering a lot of value based solely on their contribution chose to work for significantly less than that value.

Clearly there needs to be some profit for their employer, but, using my example of a lawyer - there are thousands of law firms, and if a Lawyer is capable of driving $500K/of billable value, based solely on their effort - why would they chose to work for $50K when they could go to another law firm and work for $100K (or $150K, etc...)

I'm using an extreme example, but the same concept applies elsewhere.

The reasons I can think of why a person might not do this:

o Lack of information - the employee may not realize how much value their effort drives.

o Monopoly for the purchaser of their services - they may work in a niche field, in which their is only one purchaser for their service.

  Why would an employee work for less than the value they are creating?

When two parties are negotiating a deal which creates value, both parties want to capture as big a share of that value as possible; the outcome will depend on the relative strength of their negotiating positions.

Let's say you have a machine that can make hot dogs for $3, and a concession at a sports event where you can sell hot dogs for $8. You're busy that day, so you hire me to take the cash and hand out the hot dogs.

The combination of your machine and my work generates $5 of value for each hot dog sold. If you capture all $5 I have no incentive to work; if I capture all $5 you have no incentive to lend me the machine. So how much will each of us capture?

If you have time and you can find some third party willing to do the work for $0.50 per hot dog you'll have a strong negotiating position - either I accept $0.50 per hot dog or you have the other guy do it.

On the other hand, if it's at the last minute and you can't find anyone, and there's another guy offering me $4 per hot dog, I'm in a much stronger negotiating position.

The amount of value an employee creates represents an upper bound on how much value they can expect to capture - job market competition provides the lower bound.

http://en.wikipedia.org/wiki/Surplus_labour

    This means you will likely get paid an amount
    less than the value you create for others

You are usually not creating more value then you get paid. Just because an author needs somebody to proof read his million-dollar-bestseller, the proofreader did not create millions of dollars. Just because a picker at Amazon picks stuff that makes Amazon tens of thousands in profit, he did not create that value.

To create value means to create value that otherwise would not exist.

You create some value, otherwise the company would not hire you. Of course the picker is not responsible for all the revenue accrued by the products s/he picks, just a part of it.

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