Part II · Chapter 3 · Human Capital · lesson 3
The eight factors behind a wage
13 min
Builds on What a price is transmitting
Part II · Chapter 3 · Human Capital · lesson 3
13 min
Builds on What a price is transmitting
Two jobs. Both take about fifty hours a week, both need three years of training, both are physically and mentally demanding, and both are done by people who care about doing them well.
One pays four times the other. Nobody involved is being cheated and nobody is being especially clever. Eight things are different, and the rest of this track uses their names.
A wage is not a single quantity with a single cause. It is the output of eight factors, each of which can be strong or weak independently, and a job's pay is roughly what you get when you multiply them together rather than add them.
That matters because it means one strong factor rarely carries a wage on its own, and one weak factor can hold it down regardless of the others. A job can score high on every factor but replaceability and still pay poorly.
Demand. How many people or organisations want this done at all, and how badly. It is the first filter, and it is the one nobody controls. A skill in which the world has lost interest is not saved by any of the other seven.
Scarcity. How many people can do it to the standard required. This is about the size of the pool, not about difficulty — some very hard things have large pools because a lot of people trained for them, and some easy things have small pools because nobody bothered.
Impact. How much turns on the work being done well rather than adequately. Where the difference between good and mediocre is small, so is the pay gap. Where it is enormous, the pay gap is enormous.
Difficulty. How hard the work is to learn and to perform. This is the factor everyone's intuition rates highest and it is the weakest of the eight, for a reason worth dwelling on: difficulty affects pay only through its effect on scarcity, and it is an unreliable route to scarcity.
Responsibility. What you are accountable for when it goes wrong, and how bad the wrong case is. Carrying a risk is a service, and it is paid for.
Replaceability. Not how many people could do the job in principle, but how long and how expensive it would be for this employer to swap you out specifically — including the notice, the search, the ramp-up, and the relationships that leave with you.
Leverage. The multiplier sitting between your effort and the output. An hour that affects one customer and an hour that affects a million are not the same hour, and the entire next lesson is about this.
Scale. How many units the output is spread across. The same decision made about a business with a thousand customers and one with ten million costs the same to make and is worth vastly different amounts.
Predict
Two of the eight deserve special attention because they multiply rather than add.
Leverage and scale together explain most of the extreme cases at the top. A decision that is difficult, high-impact and irreplaceable, made about something with a hundred million units, produces numbers that look absurd against the hours involved — and the hours were never what was being priced.
Impact and scarcity together explain most of the professional middle. Where the difference between competent and excellent is large and few people are excellent, the excellent are paid a lot more than the competent for the same hours.
Replaceability is the one that moves fastest and the one most often misunderstood, because it is not a property of the job. It is a property of the relationship between one person and one employer at one moment, and it changes when a competitor opens, when a system is documented, or when the person who knew everything writes it all down.
What would you do
The eight factors describe how pay is set. They are not a ranking of human worth, and three of them — demand, scale and leverage — are almost entirely properties of the situation somebody happens to be standing in rather than of the person standing there.
Two people of identical ability, in the same year, in the same country, doing work of identical difficulty, will be paid very differently if one of them is attached to something that scales and the other is not. That is not a justification of anything. It is a description, and it is the reason this track exists.
Check
Take any job you can see clearly and score it out of five on each factor. It takes about four minutes and it is more informative than it sounds, because the pattern is usually lopsided rather than uniform.
Most jobs turn out to have one or two strong factors carrying the whole thing, and knowing which ones tells you what the wage is actually exposed to. A wage resting on scarcity erodes when the pool grows. A wage resting on replaceability erodes the moment the work is documented. A wage resting on scale erodes when the thing it scales over stops growing.
The later lessons in this track are each about one of those erosion paths.