Economic theorists have long wrestled with the idea of value. What is it and how can it be measured has occupied dismal scientists for centuries. While there are many ways to measure it, economists have largely settled on markets as a good benchmark for the value humans place on goods and services.
I choose the word benchmark carefully because markets are imperfect, failing to capture such things as environmental amenities and the like. Importantly, markets balance the value placed on a good or service by both those who buy it, and those who sell it. This is a critical distinction, especially when it comes to valuing something like labor services. Let me explain.
Wages are set by something like auction markets. In these markets the willingness to pay a certain wage is balanced by workers’ inclination to sell their services. Rare skills in high demand get paid more than common skills. Confusing the situation is the fact that some skills like those of an elite athlete or performer can be consumed by almost everyone at once through the media. This drives the huge salaries of a LeBron James or Lady GaGa. Infantry sergeants and school bus drivers are relatively low paid jobs in part because they cannot rely on TV or iTunes to share their skills.
Households demonstrate their value for a service by how much they are willing to spend on these services. By my calculation, the average U.S. household spends about $0.18 per year on Mr. James, but about $75 per year on infantry sergeants. This is vital in understanding value. For it means that households value the services of infantry sergeants and bus drivers far more than all the elite NBA athletes or pop singers. This just doesn’t translate into higher wages.
It is worth repeating that market value balances the value both buyers and sellers place on a particular job. Buyers can value a job highly, but if there are many folks willing to do that job, and no way to spread their skills across lots of buyers, wages will be low. The economic lesson is that wages reflect market, not individual, valuation of work. That is a good thing because there is so much more than a pay check attached to our jobs.
Occupations that are more satisfying attract more folks, thus placing downward pressure on wages. This is probably why there is such low correlation between happiness and earnings. Job prestige will influence some folks to enter occupations, but the Top 10 lists include clergy, nurse, military officer and firefighter. These are hardly high paying jobs. Moreover I would offer that one good non-monetary way to measure the value of a job is whether it is important enough that you are needed to work on Christmas Day.
In this season many of us reflect on the value of our work. It should be heartening to be reminded that it there is more than a paycheck to the value of our labor.
