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Your answer also shows a common misunderstanding about economics, because it takes too narrow a focus. If there exist jobs that produce $1MM in value but that

Your answer also shows a common misunderstanding about economics, because it takes too narrow a focus. If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs: either the company doing the work should expand, or it should have competitors. This will lead to increased competition to hire, which means higher wages. The increased number of jobs might generate downward pressure on the value produced by those jobs (since the output is now less scarce), and the increase in salary should increase the number of people who want to work in the field (which would dampen the salary increase), but we should ultimately reach some sort of equilibrium. The fact that tech companies bemoan how hard it is to find employees suggests that we aren't at this equilibrium. To give an analogy, your explanation is akin to when people observe that the price of a good is based on the competitive market, and that the cost to produce merely provides (in most cases) a floor to that price. However, that's only part of the story: in a well functioning market large spreads between cost to produce and price encourages competitors to enter the space, which leads to lower prices. There may be delays, and there may be exceptions, but generally the function of competition is to reduce these spreads. Likewise, we should expect competition to reduce the spreads between job value and job salary, generally by increasing salaries and lowering values.

arvinds 10y ago
Unfortunately we have network effect monopolists who can get away with huge margins. See Google, Facebook
jack9 10y ago
> either the company doing the work should expand, or it should have competitors. That's not how technology works. The most evident example is where data feeds data, creating a market without compare. You can't compete with google for map data or AWS for hosting. > we should ultimately reach some sort of equilibrium The equilibrium is not based on the metrics you have proposed except in the slightest degree.
- matthewowen 10y ago
  Doesn't the fact that people are trying to compete with those services suggest that you can? Bing maps, Apple maps, Azure, Google Cloud Platform, Digital Ocean, Joyent. I don't think technology is that different. Incumbents have always had advantages. That doesn't totally preclude the possibility of competition. It might be that they compete by providing less value for less cost (eg the maps might not be as good, but they might be good enough for some users), or by servicing users that the incumbent doesn't care about (side note: isn't this what The Innovator's Dilemma is about?). But it's rare that a competitor is so dominant as to totally preclude any possibility of competition. You certainly haven't provided an example of one yet.
  - jack9 10y ago
    > Doesn't the fact that people are trying to compete with those services suggest that you can? In 20 years, we will see who is competing and who is was just funded with unicorn dreams. I don't consider a single one of those comparable.
    - phamilton 10y ago
      > I don't consider a single one of those comparable. Azure and Google Compute Engine? I'd say those are pretty comparable to AWS.
      - jack9 10y ago
        Spend 25k a month on Azure vs AWS. It's not comparable any more than Sonii branded product are comparable to Sony products. One derives revenue comes from ignorance while the other is the product being copied, badly. GCE is akin to Oracle's "cloud offering" which is simply a different product, but hey they all say "cloud" so they are competing! Market influence isn't as powerful when you can't actually deliver. What's to the left of you at 33.802799, -117.885665 using apple maps? Oh Apple Maps a different market, meaning it's not in the same market. Being apologetic about features is being disingenuous about choices. There aren't that many for people who have specific technical needs and marketing doesn't solve "address those issues" (a scripted phrase from highwinds CDN, which is another terrible service). The leaders will stay that way and there's not a lot that venture capital can do to avoid that, since outliers are absorbed in these winner-take-all markets.
gozur88 10y ago
>If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs: either the company doing the work should expand, or it should have competitors. How could you possibly determine how much value your efforts are producing? How much value are you assigning to the risk the founder and investors are taking? Maybe your $200k job is producing $200k in value. Or even less. >The fact that tech companies bemoan how hard it is to find employees suggests that we aren't at this equilibrium. Tech companies always pretend it's impossible to find employees. That's not reality, though. That's a political strategy.
- matthewowen 10y ago
  > How could you possibly determine how much value your efforts are producing? How much value are you assigning to the risk the founder and investors are taking? Maybe your $200k job is producing $200k in value. Or even less. I'm not disputing that there's difficulty, and that it might not always be possible (although we can often estimate and assign a confidence level). But the parent comment claimed that even if we did know, value shouldn't pull salaries up: that's what I'm responding to (side note: the parent also implied that we can know what values are, since he acknowledged their use as a floor for salaries).
  - hinkley 10y ago
    In college I spent a couple summers doing repair work in the shop of a family friend. I got stuck with a boondoggle repair and when it got into day 2 that I was still working on it, and the manager got pissed off and tried to take over for half an hour before he figured out why it was taking me so long. Then we had a shocking conversation about the fact that while he was paying me $x/hr, I needed to be booking at least $10x/hr in repairs, so I needed to work faster. It seemed so unfair to me until I spent a lot more time working in small companies. The repairs were a profit center, and the labor I was billing was keeping the utilities turned on, buying replacement tools, consumables, paying for my lunch break, covering rework, a hedge against me injuring myself, paying for the shop van I used to run inventory between stores, paying taxes, business licenses, my manager's salary, the owner's salary, paying for Bob to wander over and consult on a repair I wasn't sure about, paying the interest payments on the loans, and covering the loss leaders that got us repeat customers who needed repairs in the first place. Things like trade-ins and entry level equipment. At your programming job, every manager above you in the chain, every support team that you use to get your work done are all being paid out of the money billed for you. Yes you may be writing $1M in software a year, but the company wouldn't exist and you wouldn't have any sales without those other people, so all of that overhead gets subtracted from your value. Ironically and possibly painfully, a company can exist for months without a single programmer, but it can't exist long without a management chain.
AJ007 10y ago
Does this mean if a company loses money the employees should contribute to the funding of the company rather than take a salary?
- matthewowen 10y ago
  No. Why would that be a remotely rational thing for them to do? When I use "should" in my earlier post, I don't intend it as an ethical "should". I mean it as a "if everyone acts in a rational way, this should, eventually, be the outcome".
  - marcosdumay 10y ago
    If everyone acts in a rational way, and there is no occurrence of monopolies or price fixing, and if information is widely distributed, and a few other "ifs" that are not obviously missing from the scene, this should, eventually, be the outcome
    - matthewowen 10y ago
      True :).
WalterBright 10y ago
To put it in simpler terms, if an employee creates $100 in value but only costs $10, competitors will line up to outbid that $10 to poach that employee.
- nikatwork 10y ago
  ...except if all the competitors ask how much the employee was paid at their last gig, so bid $12. Price fixing is an actual thing, that's why we have labor laws. Also see: non-compete agreements.
  - eru 10y ago
    If you get bitten by that, you are just a bad negotiator.
    - toomuchtodo 10y ago
      64k Bay Area tech workers were bad negotiators? https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_Litigation https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_L...
      - eru 10y ago
        Sorry, I was only responding to your first line. Totally agree that the price fixing wasn't kosher.
      - WalterBright 10y ago
        "Our policy only impacted cold calling, and we continued to recruit from these companies through LinkedIn, job fairs, employee referrals, or when candidates approached Google directly. In fact, we hired hundreds of employees from the companies involved during this time period." It doesn't sound like it was very effective. Cartels in general tend to be unstable, as members have powerful incentives to cheat on the agreement. It's hard to say if this agreement actually reduced salaries in any significant way, as there were plenty of other companies in the area who were not part of the cartel.
dfabulich 10y ago
> If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs: either the company doing the work should expand, or it should have competitors. > in a well functioning market All these big California technology firms argue to shareholders that their network effects create a "moat" (they prefer you not to call it a "natural monopoly"), and that this is exactly why their revenues are disproportionate to their spending/hiring. I think your argument should be played backwards: the large-cap CA technology industry is not a "well functioning market" because everyone's just seeking natural monopolies--and sometimes capturing them.
adrusi 10y ago
If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs This is true generally, but I think it doesn't apply in context. Tech has saturated the existing market, there is no demand to be satisfied for more tech. Of course, the industry will continue to grow, but only because the very nature of tech is to innovate. Growth in tech doesn't come from creating new supply to fill an ever-growing demand, it comes from innovating and creating new demand. That means that the growth of tech is bound to the rate of scientific progress, of investor's wallets and of cultural change. You can't keep hiring more and more 200k developers to make more millions, because there's no one left to pay more millions. The parent, slg, was right in their analysis except for one point: employers have to compete on salary between each other, but they also have to compete against the engineer's opportunity to start their own company, which would let them earn directly in proportion to the value they produce. Engineers' salaries are therefore related to the level of risk and difficulty of entrepeneurship. The easier it becomes to start a startup (controlling for the expected returns of starting a startup), the more employers will pay their engineers.
- eru 10y ago
  As long as not everyone has eg an iPhone, I see plenty of demand for tech left.
  - IncRnd 10y ago
    You are looking in the wrong places, then. Not everyone without an iPhone wants one - the demand you cite doesn't exist.
  - adrusi 10y ago
    No. People who don't have an iPhone either have a different smartphone (their demand is owned by Apple's competition), they can't afford a smartphone (they're not a source of demand — until someone innovates and makes a cheaper smartphone), or they've actively chosen not to own a smartphone (not a source of demand).
    - 10y ago
slg 10y ago
You appear to be ignoring everything else that goes into making a company besides labor. There isn't perfect competition in the real world. Companies don't all have the same resources, customer base, or opportunities. For example, a person doing the exact same job at Facebook is going to provide more value than a person doing the exact same job at Twitter which is going to provide more value than a person doing the exact same job at a brand new startup. The Facebook employee might be producing $1m and the Twitter employee might be producing $200k. In that instance Twitter can't pay more than $200k and Facebook has no incentive to offer more than $200k. Or maybe a more concrete example, if I am the head of design for Ford, the value I produce for Ford is always going to be more than I can provide by myself because I have no way to put my skill set to use in a new company. I don't have access to the supply chains Ford does. I don't have access to the factories that Ford does. I don't have access to the labor market that Ford does. If I wanted to actually compete with them, it would require billions in funding behind me like Tesla.
- matthewowen 10y ago
  I feel like my earlier comment has been misconstrued as "if your work generates $1MM in profit than it should be rewarded with $0.999MM in salary". That's not what I'm attempting to say at all. Assessing value is definitely more complex than that. Additionally, yeah, it's true, competitors might not be able to realize the same value in the same space. Competitive advantages exist. Spreads between value and salaries will exist, and some companies might have bigger spreads than others because they're more able to realize value. I agree with all of this. All I am attempting to do is refute the claim that there's no relationship between value of work and renumeration for that work ("[t]he value someone creates has nothing to do with their salary"). I don't dispute that we can create toy examples where that doesn't happen, but they aren't effective refutations of the general point.
  - bumbledraven 10y ago
    The labor theory of value has been refuted. In a market economy, prices (including the price of labor, i.e. salaries) are set by supply and demand.

arvinds 10y ago

Unfortunately we have network effect monopolists who can get away with huge margins. See Google, Facebook

jack9 10y ago

> either the company doing the work should expand, or it should have competitors. That's not how technology works. The most evident example is where data feeds data, creating a market without compare. You can't compete with google for map data or AWS for hosting. > we should ultimately reach some sort of equilibrium The equilibrium is not based on the metrics you have proposed except in the slightest degree.

matthewowen 10y ago
Doesn't the fact that people are trying to compete with those services suggest that you can? Bing maps, Apple maps, Azure, Google Cloud Platform, Digital Ocean, Joyent. I don't think technology is that different. Incumbents have always had advantages. That doesn't totally preclude the possibility of competition. It might be that they compete by providing less value for less cost (eg the maps might not be as good, but they might be good enough for some users), or by servicing users that the incumbent doesn't care about (side note: isn't this what The Innovator's Dilemma is about?). But it's rare that a competitor is so dominant as to totally preclude any possibility of competition. You certainly haven't provided an example of one yet.
- jack9 10y ago
  > Doesn't the fact that people are trying to compete with those services suggest that you can? In 20 years, we will see who is competing and who is was just funded with unicorn dreams. I don't consider a single one of those comparable.
  - phamilton 10y ago
    > I don't consider a single one of those comparable. Azure and Google Compute Engine? I'd say those are pretty comparable to AWS.
    - jack9 10y ago
      Spend 25k a month on Azure vs AWS. It's not comparable any more than Sonii branded product are comparable to Sony products. One derives revenue comes from ignorance while the other is the product being copied, badly. GCE is akin to Oracle's "cloud offering" which is simply a different product, but hey they all say "cloud" so they are competing! Market influence isn't as powerful when you can't actually deliver. What's to the left of you at 33.802799, -117.885665 using apple maps? Oh Apple Maps a different market, meaning it's not in the same market. Being apologetic about features is being disingenuous about choices. There aren't that many for people who have specific technical needs and marketing doesn't solve "address those issues" (a scripted phrase from highwinds CDN, which is another terrible service). The leaders will stay that way and there's not a lot that venture capital can do to avoid that, since outliers are absorbed in these winner-take-all markets.

gozur88 10y ago

>If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs: either the company doing the work should expand, or it should have competitors. How could you possibly determine how much value your efforts are producing? How much value are you assigning to the risk the founder and investors are taking? Maybe your $200k job is producing $200k in value. Or even less. >The fact that tech companies bemoan how hard it is to find employees suggests that we aren't at this equilibrium. Tech companies always pretend it's impossible to find employees. That's not reality, though. That's a political strategy.

matthewowen 10y ago
> How could you possibly determine how much value your efforts are producing? How much value are you assigning to the risk the founder and investors are taking? Maybe your $200k job is producing $200k in value. Or even less. I'm not disputing that there's difficulty, and that it might not always be possible (although we can often estimate and assign a confidence level). But the parent comment claimed that even if we did know, value shouldn't pull salaries up: that's what I'm responding to (side note: the parent also implied that we can know what values are, since he acknowledged their use as a floor for salaries).
- hinkley 10y ago
  In college I spent a couple summers doing repair work in the shop of a family friend. I got stuck with a boondoggle repair and when it got into day 2 that I was still working on it, and the manager got pissed off and tried to take over for half an hour before he figured out why it was taking me so long. Then we had a shocking conversation about the fact that while he was paying me $x/hr, I needed to be booking at least $10x/hr in repairs, so I needed to work faster. It seemed so unfair to me until I spent a lot more time working in small companies. The repairs were a profit center, and the labor I was billing was keeping the utilities turned on, buying replacement tools, consumables, paying for my lunch break, covering rework, a hedge against me injuring myself, paying for the shop van I used to run inventory between stores, paying taxes, business licenses, my manager's salary, the owner's salary, paying for Bob to wander over and consult on a repair I wasn't sure about, paying the interest payments on the loans, and covering the loss leaders that got us repeat customers who needed repairs in the first place. Things like trade-ins and entry level equipment. At your programming job, every manager above you in the chain, every support team that you use to get your work done are all being paid out of the money billed for you. Yes you may be writing $1M in software a year, but the company wouldn't exist and you wouldn't have any sales without those other people, so all of that overhead gets subtracted from your value. Ironically and possibly painfully, a company can exist for months without a single programmer, but it can't exist long without a management chain.

AJ007 10y ago

Does this mean if a company loses money the employees should contribute to the funding of the company rather than take a salary?

matthewowen 10y ago
No. Why would that be a remotely rational thing for them to do? When I use "should" in my earlier post, I don't intend it as an ethical "should". I mean it as a "if everyone acts in a rational way, this should, eventually, be the outcome".
- marcosdumay 10y ago
  If everyone acts in a rational way, and there is no occurrence of monopolies or price fixing, and if information is widely distributed, and a few other "ifs" that are not obviously missing from the scene, this should, eventually, be the outcome
  - matthewowen 10y ago
    True :).

WalterBright 10y ago

To put it in simpler terms, if an employee creates $100 in value but only costs $10, competitors will line up to outbid that $10 to poach that employee.

nikatwork 10y ago
...except if all the competitors ask how much the employee was paid at their last gig, so bid $12. Price fixing is an actual thing, that's why we have labor laws. Also see: non-compete agreements.
- eru 10y ago
  If you get bitten by that, you are just a bad negotiator.
  - toomuchtodo 10y ago
    64k Bay Area tech workers were bad negotiators? https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_Litigation https://en.wikipedia.org/wiki/High-Tech_Employee_Antitrust_L...
    - eru 10y ago
      Sorry, I was only responding to your first line. Totally agree that the price fixing wasn't kosher.
    - WalterBright 10y ago
      "Our policy only impacted cold calling, and we continued to recruit from these companies through LinkedIn, job fairs, employee referrals, or when candidates approached Google directly. In fact, we hired hundreds of employees from the companies involved during this time period." It doesn't sound like it was very effective. Cartels in general tend to be unstable, as members have powerful incentives to cheat on the agreement. It's hard to say if this agreement actually reduced salaries in any significant way, as there were plenty of other companies in the area who were not part of the cartel.

dfabulich 10y ago

> If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs: either the company doing the work should expand, or it should have competitors. > in a well functioning market All these big California technology firms argue to shareholders that their network effects create a "moat" (they prefer you not to call it a "natural monopoly"), and that this is exactly why their revenues are disproportionate to their spending/hiring. I think your argument should be played backwards: the large-cap CA technology industry is not a "well functioning market" because everyone's just seeking natural monopolies--and sometimes capturing them.

adrusi 10y ago

If there exist jobs that produce $1MM in value but that have a going rate of 200k, then there should be more of those jobs This is true generally, but I think it doesn't apply in context. Tech has saturated the existing market, there is no demand to be satisfied for more tech. Of course, the industry will continue to grow, but only because the very nature of tech is to innovate. Growth in tech doesn't come from creating new supply to fill an ever-growing demand, it comes from innovating and creating new demand. That means that the growth of tech is bound to the rate of scientific progress, of investor's wallets and of cultural change. You can't keep hiring more and more 200k developers to make more millions, because there's no one left to pay more millions. The parent, slg, was right in their analysis except for one point: employers have to compete on salary between each other, but they also have to compete against the engineer's opportunity to start their own company, which would let them earn directly in proportion to the value they produce. Engineers' salaries are therefore related to the level of risk and difficulty of entrepeneurship. The easier it becomes to start a startup (controlling for the expected returns of starting a startup), the more employers will pay their engineers.

eru 10y ago
As long as not everyone has eg an iPhone, I see plenty of demand for tech left.
- IncRnd 10y ago
  You are looking in the wrong places, then. Not everyone without an iPhone wants one - the demand you cite doesn't exist.
- adrusi 10y ago
  No. People who don't have an iPhone either have a different smartphone (their demand is owned by Apple's competition), they can't afford a smartphone (they're not a source of demand — until someone innovates and makes a cheaper smartphone), or they've actively chosen not to own a smartphone (not a source of demand).
  - 10y ago

slg 10y ago

You appear to be ignoring everything else that goes into making a company besides labor. There isn't perfect competition in the real world. Companies don't all have the same resources, customer base, or opportunities. For example, a person doing the exact same job at Facebook is going to provide more value than a person doing the exact same job at Twitter which is going to provide more value than a person doing the exact same job at a brand new startup. The Facebook employee might be producing $1m and the Twitter employee might be producing $200k. In that instance Twitter can't pay more than $200k and Facebook has no incentive to offer more than $200k. Or maybe a more concrete example, if I am the head of design for Ford, the value I produce for Ford is always going to be more than I can provide by myself because I have no way to put my skill set to use in a new company. I don't have access to the supply chains Ford does. I don't have access to the factories that Ford does. I don't have access to the labor market that Ford does. If I wanted to actually compete with them, it would require billions in funding behind me like Tesla.

matthewowen 10y ago
I feel like my earlier comment has been misconstrued as "if your work generates $1MM in profit than it should be rewarded with $0.999MM in salary". That's not what I'm attempting to say at all. Assessing value is definitely more complex than that. Additionally, yeah, it's true, competitors might not be able to realize the same value in the same space. Competitive advantages exist. Spreads between value and salaries will exist, and some companies might have bigger spreads than others because they're more able to realize value. I agree with all of this. All I am attempting to do is refute the claim that there's no relationship between value of work and renumeration for that work ("[t]he value someone creates has nothing to do with their salary"). I don't dispute that we can create toy examples where that doesn't happen, but they aren't effective refutations of the general point.
- bumbledraven 10y ago
  The labor theory of value has been refuted. In a market economy, prices (including the price of labor, i.e. salaries) are set by supply and demand.