Social value of work: income as a proxy
Key takeaways
- The income that one can earn doing a job is a fairly good starting point in estimating its social value, because it generally factors in most of the relevant considerations that go into estimating the social value.
- There are a few systematic factors that weaken the relationship between income and social value. These are discussed below.
- It is very hard to come up with a robust way of weighing these additional considerations.
Why income is a good proxy
The rough argument
The reason essentially connects to why, in a (largely) free market, one's income represents how much people are willing to pay for one's services, and this is a measure of the value these services provide to those other people. A deeper understanding of why this is generally expected to be the case requires an understanding of basic economics. You might wish to check out our economics reading recommendations.
Income takes both effect on customers and replaceability into account
On the page social value of work: factors to consider, we list two important considerations: effect on customers (how much your work improves their lives) and replaceability (how different you would be than a counterfactual worker). Income takes both these considerations into account. The effect on customers consideration affects customers' initial willingness to pay (i.e., their demand curve). The replaceability consideration comes into play in the competitive bidding process that effectively sets salaries: if a lot of people are willing and able to do a job, then that increases replaceability and also simultaneously lowers the income (because of competition between workers).
Ways in which income can be a bad proxy
General problems with any economic proxy
Irrationality, imperfect information, systems being away from equilibrium, and many other general flaws with the functioning of markets make economic proxies in general somewhat unreliable.
Externalities
In some cases, your work may significantly affect other people who are not your customers and do not have contractual relationships with you. The classic example of negative externalities (your work harms others) is the polluting factory that makes the air and water unclean, increasing the incidence of various diseases in the population of the nearby town. An example of positive externalities may be: you paint the front yard of a home, and the neighbors epxerience aesthetic delight.
The existence of negative externalities is not a decisive argument against doing something, and similarly, the existence of positive externalities is not a decisive argument for doing something. Externalities are important because they point to a possible source of disconnect between income and social value.
Distinction between externalities and flow-through effects
Externalities need to be distinguished from a more general concept of flow-through effects. Flow-through effects refers to the fact that people who are not your direct customers benefit from your service, perhaps as customers of your customers. For instance, you may provide technical support to a supermarket, which in turn is better able to serve its customers. Such flow-through effects, that proceed through a chain of market relationships, are not examples of externalities, and the price mechanism should work as a reasonable proxy, at least in principle (subject to the general problems that all economic proxies face).
Wealth effects
A person providing a service to people with little wealth may not be able to make much money even though the customers gain a lot, because of their limited ability to pay. A person providing a similar service to wealthy people may make much more money.
However, it should be noted that providing the same service to wealthier people can generate more social value than providing the service to poor people, due to flow-through effects. A wealthy person and a poor person may experience the same consumption benefit from Internet access, but the wealthy person is (on average) more likely to be able to productively use the Internet access to create social value. Thus, the measurement distortion created by wealth effects is not as huge as it might seem at first glance.
Market distortions
Markets can be distorted, typically by governments, but sometimes also by non-governmental agencies that exert huge power. Examples include:
- Credentialism: Artificially restricting the pool of people who can perform a job to those who acquire certain credentials (even though the credentials are not needed for doing the job) might restrict supply, drive up wages, and also drive up the costs of getting the credentials.
- Subsidies and taxes: Subsidies to certain industries can distort the price mechanism. For instance, if the government subsidizes purchases of a certain good (education, housing, food) then incomes for people supplying that good can rise out of proportion with the value they generate. Arguably, the government subsidy is an attempted corrective for other problems that cause the service providers to be undercompensated for the social value they generate (such as externalities and wealth effects). However, this may not always be the case in practice.