5 ms·

It’s funny: I don’t know where people get the idea that people are paid based on the value they produce. People are paid based on the amount they command in the

It’s funny: I don’t know where people get the idea that people are paid based on the value they produce. People are paid based on the amount they command in the labor market, and labor markets are local (and if they produce less value than they command, there’s no hire). It works like nearly every other economic transaction. Engineers cost more in the valley because there is far more competition to hire them, not because they are unilaterally better or more qualified. (Not to say there isn’t a lot of great talent in the valley, but I’m sure there’s lots of talent outside the valley as well.) 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).

loki49152 6y ago
Labor markets aren't local when everyone can work from home. That's why this kind of move is absurd. Talent outside the Valley might be willing to take lower pay, based on lower cost of living, but just like everything else the price of their labor shouldn't be based on the cost to produce it.
- amscanne 6y ago
  Labor markets are still local until we have widespread remote working. That’s not the case yet. I’m sure companies remote compensation will become competitive in the all remote market as it evolves, whatever it turns out to look like. 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.
harshitaneja 6y ago
While I agree that there is dissonance between value produced and salary paid, but your argument doesn't seem to hold as well.If higher competition drives salaries upwards then the salaries should increase in a remote worker economy as worker pool is not bound to a geographical locality but rather to the whole planet(or at least a larger region if culture or timezone differences are major concerns). Economics of demand and supply is much more complicated than we could reduce to a liner or so about competition or a few factors. Increased base living costs for the employees combined with the larger availability of capital with the employers probably plays a major role here.
- amscanne 6y ago
  There are still very few companies that want to hire pure remote, so demand is low. This might all change: supply goes up as people go remote, demand goes up as companies look to hire remotely. It’s unclear what this market will look like, but I sincerely doubt it will mean higher compensation than the current Bay Area salaries. 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).
PaulHoule 6y ago
In theory a business that was paying somebody $8 to create $800 of value would have an incentive to pay a lot of people until either the $8 increases or the $800 decreases. If they didn't do it, somebody else would. 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.
- amscanne 6y ago
  > 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. 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.

loki49152 6y ago

Labor markets aren't local when everyone can work from home. That's why this kind of move is absurd. Talent outside the Valley might be willing to take lower pay, based on lower cost of living, but just like everything else the price of their labor shouldn't be based on the cost to produce it.

amscanne 6y ago
Labor markets are still local until we have widespread remote working. That’s not the case yet. I’m sure companies remote compensation will become competitive in the all remote market as it evolves, whatever it turns out to look like. 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.

harshitaneja 6y ago

While I agree that there is dissonance between value produced and salary paid, but your argument doesn't seem to hold as well.If higher competition drives salaries upwards then the salaries should increase in a remote worker economy as worker pool is not bound to a geographical locality but rather to the whole planet(or at least a larger region if culture or timezone differences are major concerns). Economics of demand and supply is much more complicated than we could reduce to a liner or so about competition or a few factors. Increased base living costs for the employees combined with the larger availability of capital with the employers probably plays a major role here.

amscanne 6y ago
There are still very few companies that want to hire pure remote, so demand is low. This might all change: supply goes up as people go remote, demand goes up as companies look to hire remotely. It’s unclear what this market will look like, but I sincerely doubt it will mean higher compensation than the current Bay Area salaries. 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).

PaulHoule 6y ago

In theory a business that was paying somebody $8 to create $800 of value would have an incentive to pay a lot of people until either the $8 increases or the $800 decreases. If they didn't do it, somebody else would. 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.

amscanne 6y ago
> 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. 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.