Someone mentioned in front of me that prices just keep going up. “Just look at housing,” they said. I interrupted to say that, priced in gold (the US Dollar used to be priced this way), housing prices (and everything else) are long-term gently trending downward (productivity gains, technology, etc). He countered, “they’re going up relative to incomes.” Ok, that’s interesting! Let’s dive in.
Labor Markets Oversimplified
Imagine you’re a baker, and you sell a pie into the economy. In exchange for your labor, materials, and expertise, you receive a specific amount of currency. That specific amount of currency is exactly enough to buy back the pie or its equivalent. When you deliver x amount of goods or services into the economy, you receive enough currency to buy back that “equivalent” amount of goods or services. In a free market, “equivalent” is determined using a very robust mechanism called “supply and demand.”
Now, while that’s a wonderful mathematical characterization of free-market capitalism, it’s not how things work presently. In reality, when you deliver 2\cdot x worth of goods and services into the economy, the governments combined keep approximately half, so you’re then able to purchase back roughly x worth. The amount you’re able to receive from the economy is substantially lower than what you’re putting into the economy.
Also, remaining at a company over time generally grows your income at the official government reported inflation rate. The real rate of price increases is generally double the official reported rate. Goverments like to underreport inflation for a variety of reasons, but a very simple way to see this in action is to change jobs. Changing employers is a quick and effective way to get a pay raise because you’re resetting your income back to the market rate for labor (i.e. the real increase in inflation).
You’re welcome to do the math for your particular situation. For example, I live in Maryland. 24% Federal (if not more) + 15.3% FICA + 9% state and local = 48.3%. Try adding property and sales tax on top of that. Don’t forget tariffs and VAT taxes. And if you really want to cover everything, include (double) the inflation tax on any savings. Maybe include inflation on any wages since your last job change. Of the x that you contribute to society, what do the governments allow you to take back? It’s well under x/2.
Types of Labor
There is no one price of labor because there isn’t just one category of labor. A fuzzy and indefinite pecking order exists between the labor categories.
- Jobs that satisfy needs
- Jobs that satisfy wants
- Jobs that satisfy “nice to haves”
- Jobs that satisfy things we really don’t want
- Jobs that produce goods and services that are illegal
Too much can be said about this categorization, so let’s cover the biggest effects.
Wanted
Needs are as old as humans themselves. Technology has long since cheapened the price of food and clean water. Yes, shelter is a need, but living alone is a want (a luxury, in fact). Also and importantly, needs tend to remain inexpensive in any democracy, otherwise the government intervenes to… have an effect that isn’t necessarily the intent.
Satisfying wants might be a sweet spot. Maybe include this consideration when choosing a career.
Fulfilling people’s nice-to-haves is quite a spectrum in itself. When the demand is uncertain, so is the income of those who work these fields. People often choose job roles for their own selfish reasons. They try to turn their hobbies and passions into careers while ignoring whether they actually provide any value to society. As our more recent generations come of age in ever-easier times, they are generally more likely to initially choose job roles that don’t necessarily provide much value to society.
Unwanted
Careers that produce unwanted goods and services are possibly the most interesting category of them all. Laws and regulations insist that law-abiding citizens and entities behave a certain way, and job roles sprout up to help everyone through their maze of compliance.
In many regions of the developed world, parents simply aren’t allowed to leave their children home alone, even when it may be appropriate to do so. So childcare (and early education) will be overrepresented relative to an actually free market.
When someone is forced to purchase a good or service they honestly don’t want, they opt for lower quality. Prices go down, and it becomes a race to the bottom for those offering goods and services in that realm.
Illegal goods and services can be the most entertaining to think about. When governments outlaw certain goods and services, they restrict the supply of those goods and services. If demand shrinks at the same rate, then prices remain relatively static. But when the penalty for selling substances is steeper than the penalty for consuming them, supply falls faster than demand, and incomes rise within the career. The biggest downside to working in illegal fields is the risk of penalty, but if your ties to the region are weak, then it’s not such a big deal to flee the region and start over.
Importing Labor
When we import goods and services, we also import the labor that produced them. While every consumer agrees that importing goods and services is a wonderful way to keep prices down, not everyone is so quick to acknowledge what happens on the labor side.
Labor roles that must be done locally cannot be exported to the 3rd world. Labor roles that require careful manipulation of the physical world cannot be exported to artificial intelligence. Why do we think the trades are paying so well?
Decreasing Costs of Labor
Currency is only valuable because it’s backed by goods and services. Exchanging currency to extract value from an economy requires that the value must first have been produced or provided by someone, somewhere.
As we saw above, participants are choosing job roles that provide less value to the economy but expect to extract high value in exchange. But also, the governments confiscate a percentage of what we contribute, so we can’t even extract as much as was contributed. It’s a bit of a double whammy.
Households used to be able to thrive with a single income earner, but now we need two. What changed? A combined tax rate of 10% has turned into a combined tax rate of 50%. The output of some of the labor has diminished. But also, the single-income household didn’t need childcare, big screen televisions in every room, supercomputers in everyone’s pocket, and 3-4 cars in the driveway.
Originally, children were free (especially before the word “free”). 100 years ago, children were nearly free to raise. Where does that stand now? Why?
Participants are extracting gigantic value from the economy while contributing less and less back, but complaining that their standard of living is going down. We have it really, really good! As long as the rest of the world is willing to export its goods and services for worthless green paper, the gravy train will continue. But even then, when the rest of the world wakes up, we’ll stop importing our labor, and we can start generating value locally again. We win either way.