It’s Payday!

Do you deserve a raise? Of course you do. Everyone thinks that he or she is underpaid. ThatÁ¢€â„¢s just the nature of the working world. Teachers think that they are underpaid; AIG employees who received $700,000 bonuses believe that they are underpaid, too. Now, many teachers and all AIG employees who received $700,000 bonuses make more than the U.S. median income of $50,700.

Auto workers make more than the median, about $60,000 on average. Meanwhile, GM’s former CEO Rick Wagoner made $14.4 million dollars in 2007.

Who is overpaid? Who knows? My guess is that the guy on the line churning out Cobalts thinks heÁ¢€â„¢s underpaid, and Wagoner thought that he was, too. WagonerÁ¢€â„¢s neighbors are probably jealous of his being one of the richest guys in Detroit, and the average UAW workerÁ¢€â„¢s neighborÁ¢€â„¢s is probably bitter about a GM employee’s Cadillac health insurance.

How much money Á¢€Å“shouldÁ¢€ anyone make? There are two thoughts on that. The first is simply supply and demand. The more people who can do a job relative to the number of openings for it, the lower the pay. Employers will pay as much money as they need to get people to fill the seats and not one penny more. Under this theory, it doesnÁ¢€â„¢t matter what the worker actually does; the market decides on the value.

The second theory is that people should be paid relative to the value that they add to the finished product. This is easier, or at least more palatable, to measure in some fields than in others. Most teachers oppose any type of merit pay, even though we all know that some teachers are better than others. Meanwhile, many sales people work on straight commission. They get paid only if they produce. They can tie their pay to their output. Businesses have tried to do this with all employees if possible, giving them company stock and setting bonuses based on performance. That way, a company can see if a raise is justified without going through the hassle of advertising for the job and seeing who applies. Unfortunately, merit pay has led to the complicated situation where employees can beat their numbers even while the company crumbles around them. See: AIG.

Karl Marx though he would solve the problem of how much money everyone should make by taking from each according to their ability and giving to each according to their means. That didnÁ¢€â„¢t work very well. People are greedy; our greed has helped us thrive as a species. You canÁ¢€â„¢t change that.

This sense of what people deserve to make plays into the debate about taxation. Only 3.7% of American households make more than $200,000 per year, but youÁ¢€â„¢d think it was more than that. That range includes people who make $200,000, $700,000, and $3,000,000, a huge dispersion. Someone making $200,000 isnÁ¢€â„¢t as rich as someone making $700,000 and may feel resentful being placed in that category instead of being grateful for being better off than 96.3% of the country. For that matter, $200,000 is a heck of a lot closer to zero than it is to $700,000, and that can be unsettling in bad times.

Bad times are interesting times. The U.S. taxpayer is now a shareholder in several large corporations and has to set the delicate task of paying people the minimum possible to get them to stay in their jobs. The U.S. government has an enormous deficit and needs to raise taxes with as little political pain as possible. And in a recession, fear and anger are higher than usual. I have no great answer, but it helps to know how the numbers work.