What is a worker worth? The answer provided by the economist is: what someone is willing to pay for that worker’s labour. As in all markets, prices reflect supply and demand. The trouble is that this answer makes us uncomfortable because of the extreme outcomes.
The Tottenham Hotspur footballer Gareth Bale is reportedly on the verge of completing a record-breaking transfer to Real Madrid. The Spanish club seems set to pay Tottenham as much as £86m to secure the player’s registration. Meanwhile, the Office for National Statistics has said it is going to look into how many “zero hours” workers there are in the British economy to address concerns that it has drastically underestimated their numbers. The average rate for workers on such flexible contracts is estimated to be £9 an hour. Bale is likely to be earning about £165,000 a week at Madrid. Many zero-hours workers will be taking home less than £360 a week. Can Bale really be worth some 450 times as much as a zero-hours worker? Does a world of “heroes and zeros” make economic sense?
The first thing to say is that we don’t know. Real Madrid don’t know how Bale will perform if he makes the move. They don’t know whether or not he will score goals that will be crucial in delivering the success on the field they crave. And on the commercial side, the club don’t know how many replica football shirts Bale’s name will shift. The club make a judgement about his worth to them. But that judgement might well be wrong. Anyone who follows football will know that many big-money moves fail in footballing and commercial terms. Some football analysts think Madrid could be overvaluing Bale by as much as £50m.
It’s not just football clubs that can pay over the odds for labour. A select group of traders who work in investment banks in the City of London receive multimillion-pound bonuses every year. That is why young men (and a few women) like Moritz Erhardt, the Bank of America Merrill Lynch intern who was reported to have died from exhaustion last week in his London flat, are prepared to work insanely long hours to break into the magic circle. They regard the potential rewards worth the agony. The chief executives of large companies are, as we know, lavishly remunerated too.
Are they worth it? The answer is, on the whole, no. Profits in banking are high not because traders are brilliant, but because institutions enjoy a hidden subsidy from the taxpayer by virtue of being too large to be allowed to fail. Similarly, while levels of chief executive compensation have exploded in recent decades, most of those pay packets bear little relationship to the returns of shareholders. What those remuneration levels reflect is not the balance of supply and demand for labour but the relative power of traders and bosses within their corporations and their ability to extract a vast surplus.
So companies can overpay for labour. They can also underpay. Bosses often have a short-term mentality. They employ workers on zero-hours contracts because they want to shrink their cost base and support profits. But firms that treat workers well and invest in building their employees’ skills can be more profitable over the long run. Workers in such firms are more loyal and more productive. The employee-owned John Lewis department store chain, which this week announced it will hand out a total of £40m to staff that it had accidentally underpaid, is an example of that effect.
The gap between the pay of Gareth Bale and zero-hours workers might, indeed, be higher than it would be if the market for talent were as efficient as economics textbooks presume. The gap between the pay of a City trader and a zero-hours worker is certainly larger than is economically justified. But there would still be a gap in a perfect market. Some inequality is inescapable. Bale’s skills are rare. Football fans will pay a lot of money to see him play. Overvalued or not by Madrid, he would command a hefty pay premium. The same goes for Hollywood actors and rock stars.
And investment bankers, despite their undeserved bonuses, tend to have a higher level of education than minimum-wage workers. They are intelligent and highly motivated. If they were working in any other industry – law or medicine, say – those attributes would enable them to command a wage premium over most people too.
So should we sit back and let the market decide pay levels? In the main, yes. Market economies may be inefficient, but the alternatives are far worse. Centrally planned economies such as the Soviet Union and China under Mao have been poor and brutal. Yet that is not to say that state intervention in private sector pay is always unwarranted. Sometimes it can make our economy more efficient.
Financial regulators, acting on the insight that banks can pose a threat to the stability of the whole economy, have instructed traders to be paid bonuses primarily in the form of shares, rather than cash, to bind their financial interests to the institutions in which they work. Not even bankers have objected to that reform. The European Union, for similar reasons, is mandating that annual bonuses in the financial sector should be limited to twice fixed salary.
Such interventions have their merits, although a better approach would be to reform the structure of the financial industry, eliminating the hidden subsidy. On executive pay, the Coalition is legislating to give shareholders a legally binding vote on remuneration in order to encourage investors to put a stop to the corporate looting taking place under their noses. The pity is that such a vote will take place only every three years.
At the other end of the pay spectrum there is a legal minimum wage which seems to have done a good job in curbing the instinctive short-termism of some firms. But should it be increased? And should zero-hours contracts be banned? Or would those interventions have the counterproductive effect of making businesses less liable to hire, resulting in higher unemployment?
These are difficult questions to answer. Getting public policy on pay right will be a long road with many confusing signals and some dead ends. Trial and error, with a dash of humility, is required. But on the bumpy journey we should keep in mind the truth that work is only one aspect of our lives. A salary, in the end, is what you get paid, not what you’re worth as a human being. None of us are zeros.