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Last week, New York City’s new mayor, Eric Adams, referred to certain people as “low-skill,” which sent people into a tizzy. As the Vox headline that caught my eye read, stop calling workers “low skill.” Instead, they are low-wage.
When I see any discussion of prices, I think price theory may have something to tell us. Can we say more? Is there a connection between skills and wages? After all, economics seeks to understand prices, both why they are at some level and why they change. We start from an observation like diamonds are worth more than water. We then ask why?
We all look out into the world and see that people earn different wages. That doesn’t take some deep econometric analysis to discover. But why? One response is that the high-wage workers work harder. That’s maybe what a motivational speaker will tell you, but it is like saying diamonds are worth more than water because they are hard to produce. We don’t like that answer. There is also nothing “inherent” about the worker, like an intrinsic value, distinguishing high vs. low-wage workers.
Vox’s Jerusalem Demsas argues:
Adams succumbs to a common error: Believing that skill (not supply and demand for particular types of labor) is what differentiates higher-paid office workers from in-person service laborers.
I can’t disagree when someone says we need to consider supply and demand. I agree! Supply and demand is what differentiates workers.
Contrary to the quote, supply and demand can determine wages (which it does), and skills can also determine wages (which they do). Lebron James’s high wage seems somewhat related to his skills as a basketball player. We just need to specify the connection between skills and supply and demand.
The Demand for Skills
Let’s think about the demand side for a second. Firms demand workers. Why? We call this type of demand “derived demand” because the firm doesn’t directly want workers. Instead, the firm wants what the worker “produces” in the most general use of that term. Firms want workers that sell goods, fix IT problems, clean up messes at the office, and do all sorts of things that ultimately help the firm make money.
Firms are willing to pay more (demand more) for workers that produce more. So why do some workers produce more for the firm than others? What’s the cause of their productivity, which ultimately causes them to have higher wages?
There is something that Armen has that Bengt does not have, so the firm is willing to pay worker Arment more money than it pays Bengt. We don’t know what the firm’s value is. It is subjective.
Here’s where I disagree with Jerusalem: I’m fine calling the thing that firms demand, whatever it is, “skills.” A quick use of the old Google machine tells me that the definition of skill is “the ability to do something well.” Once we’ve fixed the task we are talking about, we can see that more skilled workers will get paid more.
But even more generally, I stick with the language of skills because I don’t think it is confusing/misleading even for non-economists. If I say something mandate like “high skill workers earn more,” no reasonable person will come back with, “That’s false, since I’m very skilled at rapidly translating Ovid into Klingon and yet don’t make any money doing it.”
Duh. When we say skills, we mean skills valued in the labor market. I don’t believe that people struggle to differentiate what we mean by “skills in the labor market” and “skills that appear on Britain's Got Talent.”
The language is imperfect, but it’s not worth throwing out.
How can we differentiate those skills that increase wages from those that do not? It’s not arbitrary. There seem to be systematic patterns that emerge.
Skills will be rewarded in proportion to their applicability across firms. Again, wage depends on the overall market demand for the skills.
To see this, suppose I learn some skill that is only valuable at my current company. Will my wage increase?
In general, no. If this skill is not valuable to any other company, I have no bargaining power. No other company is further bidding up my wage. With no one new competing for my skill, I likely won’t increase my wage.
It is only when skills are valued by more than one firm that the skills increase wages. The more firms interested in that skill, or the more general it is, the more it will drive up wages.
Learning to use a company-specific programming language won’t drive up your wage. Learning to use Python will drive up your wage. Learning to program, in general, will drive up your wage even more.
So when we talk about the skill “programming,” we mean general skills that are somewhat transferable, even though learning a certain niche programming language may be very hard and highly skilled. When someone says, learn to program so you can get a job, I assume they mean general skills.
None of these measures of skill are god-given or fixed forever. The generalizability of a skill depends on the market situation. When more firms are competing for programmers, that drives up demand. When machines or other workers can replace that skill, demand decreases. As Demsas writes:
There is no absolute inherent measure of skills that determines whether a worker has what it takes to sit in a corner office. Skill is dependent on the context of supply and demand for specific tasks and roles. If tomorrow a computer could suddenly do my job, or if everyone decided they didn’t want to read explainers anymore, nothing would have changed about how “skilled” I am, but everything would change about Vox’s willingness to pay me my current salary to continue to do it.
Yep. Absolutely. Supply and demand. All the way down. But supply and demand for skills!
Skills and effort are also related, but not necessarily in the way everyone thinks. Some people seemed to believe (or feigned belief) that Eric Adam’s comment implied being a cook is an easy job. No. Lots of low-skill jobs are tough and that only affects the supply side, not the demand side that we emphasized above.
First, assume everyone is the same. Then to induce people to work hard, you would have to pay them more. But skills conflate this whole story.t If people are different, say some are better skilled by birth or by previous education, we will see the people that exert the least effort being paid the most.
In fact, we could easily imagine skill and difficulty going in exactly opposite directions. For a silly example, Tiger Woods has a much easier time golfing than I do. I work very hard on the course. I put in way more swings. Still, Tiger’s skill causes his low effort today and his high wage. My lack of skill causes my high effort and my low wage. Either way, skill matters.
So I’m not ready to toss out the helpful language of “skills”. Otherwise, you will say something like “Wages aren’t based on skills”, as Demsas does, which can’t be true.
Are there low-skilled workers?
I think an important heuristic this isn't touching on (at least directly) is that success for people in the labor force is dictated by the same golden rule that dictates success for firms in the market - irreplaceability / inimitability.
I don't think discussing wages through lens of skilled vs. non-skilled is very productive, for the exact reasons you've highlighted (i.e., it offends people). I think a generally translatable rule is that labor that is harder to replace is going to earn higher wages than labor that is easier to replace.
That framework has important implications separate from what you've laid out above, too. Take for example the worker you described who learns a highly specialized programming language - his 'skills' are going to be difficult for a firm to replace, which could give him significant negotiating leverage with his current Company.
What an excellent post Brian. Maybe you could comment on my understanding of this mechanism? Supply and demand factor in of course, but I think we're barking up the wrong tree when we use the word "skills" - it's too subjective on its own. I find it easier and more to the point to use the word "productive". Productivity, in the economic sense, is the value that a worker provides to his or her employer. Usually, more "skilled" workers "produce" more widgets. But the mechanism for creating the higher remuneration, in a non-unionized environment especially, is the productivity that a specific worker provides for the company.
This is the first mechanism we should look at, and then we examine the supply vs demand dynamic which further hones the final wage. Where the supply vs demand dynamic is most prevalent is where lower productivity workers are in short supply, which drives the wages up, sometimes past the marginal productivity that works most prominently to produce the wage levels of more productive workers.
Viewing the problem from a productivity perspective, the stagnation in wages for less-productive workers* makes perfect sense, as the demand for this kind of labour has plummeted, while the supply of less-productive workers has not.
*To be clear, less-productive worker refers to the lower value-added output of these workers as judged by the market – you and I in other words – and not to how hard these people work. In fact, with the rise in minimum wages and the sharp drop in demand for their services, less-productive workers have to work harder than ever.