Thread by @Noahpinion

Happy February, everybody!

Today's @bopinion post is about a very important question: Are people paid what they're worth?

bloomberg.com/opinion/articl…

Some people think economics says that people are paid what they're worth.

In fact, it's a little more subtle than that.

Here's an explanation of the basic theory that wage = marginal product of labor:

But this classic theory assumes that the labor market is highly competitive.

In reality, it's usually not.

You can compare *average* productivity with *average* wages, but A) this doesn't tell you about marginal product, and B) this is about aggregates, not individual jobs.

Most people who decry the wage-productivity divergence also probably think CEOs are overpaid!

Some researchers do try to get at the question of whether people are paid their marginal product.

One thing they tend to find is: Discrimination.

Discrimination is a good reason to suspect you're not getting paid for what you produce!

nber.org/papers/w5626.p…

Here's some clever research showing that workers tend to be underpaid on average:

research.upjohn.org/cgi/viewconten…

But in fact, even if workers WERE paid their marginal product, that wouldn't mean they'd be paid what they're really worth to society.

Because private monetary value does NOT equal social value!

In fact, the difference between private and social value could mean that people in some industries, or occupations, are *overpaid*.

What happens if everyone starts doubting the value of their own job?

What happens if everyone starts suspecting that they're not getting paid what they're worth to society?

What happens if everyone starts suspecting that other people are being paid too much?

We'll never really know who's underpaid and who's overpaid, but our government should constantly be trying to tweak our institutions so that pay is a little better aligned with social value.

That way, hopefully we'll at least inch toward fairness.

(end)