As an employed worker, you must be wondering at some point why are some jobs paid more than others. The following questions may have been in your head at some point.
Why are some salaries so low? And some so high? Is it because a company is willing to pay them more money? Is it due to some magic formula conjured up by wizards? Is it that some companies are just cheap and unwilling to fork over money (How dare they eh, these damn profit seekers!)? And why is it that salaries can vary differently from different countries even though the roles can be exactly the same?
The answer is simpler than you can imagine. Economics. Supply and demand. A great demand for a certain skill will require the same amount of supply to meet that demand. All things being equal.
This is known as the supply and demand curve. Three key things here:
- Prices (vertical axis, dictated by P) go down as supply (horizontal axis, dictated by Q) goes up.
- Likewise prices go up as supply goes down.
- There is a natural equilibrium in the middle where Q meets P.
If there's a great demand but a lack of supply, rising wages will entice more people to take on that skill in order to meet that demand. Likewise if there is a lack of demand and too much supply, then wages will fall leading to loss of jobs until the demand and supply reach equilibrium.
But surely some wages are too low? They must be at least liveable, should they not?
The answer is again, the reason why these wages are low, is because there is an oversupply of people meeting the demand of these jobs. A burger flipping job is not job for adults. A low skilled job mean anyone is able to fulfil these positions. Even a teenager with zero skills.
This is the free market in action. Without intervention.
Okay what happens if the government tries to "do good" by intervening? What if they fix a minimum wage? What happens then is that fewer people will be hired, remember these are supposed to be low skilled jobs. There is already a surplus of supply. Now you're artificially increasing the wages of these low skilled jobs. Therefore businesses can do two things, and only one of these two things:
- Increase prices just to maintain their profit margins.
- Be forced to let some people go, hence causing people to lose their jobs.
Those greedy bastards, how dare they maintain their profit margins by firing people?!? How dare they even make profit?!?
In a free market where competition is abundant. Profits never last long. Why is this? If a product is extremely profitable, competition will come in, leading the product's price to go down over time. Therefore profits go to zero, over time. This is what should happen in reality, in a free market with no intervention.
But today there are some companies with massive profits, all the time. How'd they become so powerful? They have something called a moat. Something achieved only through a monopoly, or massive market power. Facebook, Google, Amazon, all have massive moats. However remember it was not always like this. At some point they were small puny companies barely making a profit. You would have never heard of them. But people, the population by and large, you, picked to use their products. They gained massive power over time, and hire the largest army of corporate lawyers, the largest and best engineers on the planet. And they can only do so because they make massive amounts of profit. That is why tech, especially big tech, has the largest salaries on Earth. These companies are printing billions of dollars every day.
But you said profits should go to zero over time! And they do. Over time, something, someone will disrupt these companies. Over hundreds of years companies have come and gone. Bit the dust. No company lasts forever.
The ones that do survive over time, only survive because of:
- State funding (leeching off government aka taxpayers' money)
- Crony capitalism (basically companies linked to political leaders)
- Forced legislation (this company must exist to do something by law, even if it's nothing much)
- Monopolistic practises (we have no competition!)
Like Swedish banks. Zero to barely any competition, and some existing over a century. They should be dead by now, but instead are still alive. So, compared to the age of the banks, the tech companies are barely adults.
Back to the thousands of businesses trying to survive today. Let me talk about Singapore. Where good food is abundant like sand in the sahara. Profit margins are razer thin in Singapore when it comes to buying meals. There is massive competition. Efficiency is key. Food stalls come up and then drop like flies. Massive competition is great for the consumer but terrible for the businesses. I envy anyone who is crazy and brave enough to start a food business in Singapore, because I wouldn't want to be in that field. That is why food is so affordable in Singapore, because profit is next to zero for most of them. This is what happens, in a truly free market.
Now salaries can vary from country to country. Again, this is a matter of supply and demand.
The US is a tech focused country. How would I know this? It's very simple. Look at the stock market index constituents. The largest companies in the US are the tech companies when it comes to the stock market index. Therefore, tech workers are prized highly in the US. So it makes sense that the highest salaries are in the tech sector when it comes to the US.
When it comes to Singapore, the largest constituent by far, are the banks. And guess where are some of the highest salaries in Singapore? The banks of course.
Every country has its own supply and demand curve, so to speak.
But what about government jobs? Who dictates those?
Remember the government is *not* a free market, but a monopoly. They set their own rules and salaries. Which means salaries can be artifically high or artificially low. Remember the supply and demand curve. There is no actual competition when it comes to government. Which is why working for government is one of the worst things you can possibly do, as a proponent of a supporter of free markets. Jobs that should not exist, exist in abundance in the government. This is all a big loss to the overall economy. You might even say, a complete waste of taxpayers' money. Even industries competing against the government will have a tough time as they have to set wages equal to the same salaries as the roles in government, they cannot set their own wages without risking their own survival. Healthcare for example.
In a free market, healthcare would be set by the market's supply and demand. If dictated by the government, then wages set are at best an illusion of what the actual price should be and the supply and demand curve are a mirage. Competition would not even solve this issue, as wages are artificially set. Let's assume we're talking about doctors. If the government sets wages too low, there will forever be a lack of doctors. Likewise if they set them too high, there will always be a demand for doctors.
Now imagine this, what if the entire population was generally healthy? Then this would be a complete waste of taxpayers' money from the surplus of doctors. Imagine a scenario where there are dilapidated buildings, which means an actual demand for builders. However in a scenario where the government sets wages too high for doctors, one who is interested in embarking on a career might seek to become a doctor instead of a builder, even though there is an actual need for builders due to the dilapidated buildings. Amplify this over many years and many careers, and you should see why there's always an ever growing problem when it comes to the economy, where some jobs are never filled and some are always filled. The market always sends out clear signals but government will never meet these signals because they distort the economy.
Remember over time, with competition, prices should come down. However some wages never seem to go down do they? And some wages never go up? And you wonder why?
Government always distorts the free market (And what's worse is governments printing money that they also do not have, leading to price increases over the time from all the inflation that they cause).
The free market explains why some wages are high and some are low.
And it always boils down to supply and demand. Unless we're talking about government, which is a monopoly.
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