Wage disparities

I often wonder why some people make more money and hold higher positions than others for the same work. Some popular arguments propose discrimination, sexism, “glass ceilings”, “bamboo ceilings”, ___ ceilings, while other more methodical regression analysis based research factors in time, hours worked (sweat equity), family, etc. The statistics are all across the board from “women make 70 cent on every dollar” to “only 12 out of  the fortune 500 CEOs are women, or 20 of the 500 asian CEOs.” I won’t touch further on these contentious arguments, but I would like to share an observation from a behavioral psychology view.

I think society places an extremely large premium for experience – or more specifically in my definition, the ability to quickly execute heuristics developed through years of pattern recognition from similar situations. What I mean by pattern recognition is that our brains are wired to recognize patterns, learn from pain and mistakes to avoid them, and do it quickly to maximize survival. This ability has translated to modern society through the process to wage earning. But, given that we all have finite and identical hours in the day, how can someone command a 10x premium?

Some people invest more hours to work, but that’s a linear return, or zero in some cases. Others learn and gain experience faster; a multiples modifier. One can also manage others, a geometric return depending on the quantity and quality of those employed. Exponential return can be gained via technology. But, how should one invest their time and on which strategies to maximize returns? It’s conceivable that those who manage more people and layers of people are thus more productive. Similarly, smarter people accomplish more. Add these effects up and one may get 10x.

However, the system, in my experience, seems quite crude. My best example is of a senior level financial analyst who did not know Microsoft Excel basics; unfathomable. We rely on simple market signals such as education level, prior roles, years of experience, etc as shorthands to measure the above. If a job requires longer hours, the wage may increase proportionally. We assume that a university degree screens for an avg IQ of 115 (with some stratification based on school). Years work qualifies candidates to apply for certain titles and job bands. In reality, there are way too many variables and motivations behind our actions to assume compliance with the rational correlation of ability and ultimately, income.

It’s really quite a shame that we don’t have more efficient labor markets.

-fp

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~ by fp on June 28, 2014.

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