December 5, 2020 Reading Time: 6 minutes

I have a friend who constantly complains about her low pay. All things considered, she’s rather privileged: lives a good and healthy life, in a safe and beautiful country; she’s thinking of buying a house; she controls her own hours (her work is corona proof); she doesn’t have a possessive boss breathing down her neck. Still, on the topic of pay or work, she never passes on the opportunity to inform everyone that she’s “underpaid.”

Many people do this, from the objectively low-earners at some fast-food joint, to the comfortable middle-class teachers, academics, or union members who think they deserve ever more financial comfort out of their lives. 

When people say that they are underpaid, it’s not instantly obvious that they are wrong: academics spent a dozen or so years in school, probably amounting a serious debt load; qualified teachers similarly spent a lot of time in school and in training, with the pay of a mid-level administrator who barely passed high school. They know and do important things; shouldn’t they be compensated accordingly?

We also shouldn’t disregard the inferiority complex that comes with believing that. Being a supposedly enlightened someone, say the culturally refined elites or nurses or schoolteachers, they make only a fraction of what dimwit influencers or smug hedge fund managers do. The former make “actual” contributions to society, while the others just shuffle money and attention around. 

On a more fundamental level, I often wonder what my friend even means. Per Ludwig von Mises’ Action Axiom, subjective values and preferences are embodied ‒ even demonstrated ‒ through action. Talk is cheap; put your money where your mouth is. This would imply that my friend clearly doesn’t think she’s underpaid. If she had, she would have quit her job long ago. She can find another employer that would pay her appropriately; she can shift her labor into a more lucrative line of work; or she can refuse to work altogether, deeming her superior skills to be unworthy of such degrading activities. 

As she keeps working yet keeps complaining, from this dissonance we must conclude that she’s trying to communicate something else. She might mean that she resents her low pay and would like to be paid more. That would make her statement trivial, as few people wouldn’t want to be paid more for doing the things they are currently doing. What, then, could she possibly mean? 

Here’s one possibility: trying to get sympathy for unavoidable chores the same way we might complain about having to do our laundry or clean our homes. When we reluctantly do those things, we’re not actually complaining about doing them ‒ as we value the result higher than the costs of cleaning ‒ but rather wishing we could have a tidy home and clean clothes without putting in the work required. 

Or that she’s trying to signal her superior virtues to everyone who’ll listen: the world owes her some (higher) standard of living for what wonders she provides.

The more plausible explanation is that she doesn’t understand value, which, admittedly, is a hard topic to grasp. The first Austrian Economist Carl Menger, and many others of his generation of economists, struggled for years and decades before the old notions of objective (labor) theories of values were abandoned. “Marginalists,” writes Janek Wasserman in a new book about the history of the Austrian School, “flipped classical economics on its head. […] It is the satisfaction of the wants of consumers that matter for value, not the labor required for production.”

Still, the mistaken view of value lingers, inside and outside the profession. 

The Maximum Wage of a Basketball Player 

While my friend isn’t exactly at the bottom of the income distribution, for clues to what it means to be underpaid, we may ‒ counterintuitively ‒ look at the opposite end: a well-known high-earner who on $38 million a year couldn’t possibly be underpaid, could he?

During my second year of university in Glasgow, we had a guest lecture on inequality by Professor Sheila Dow, a post-Keynesian professor at Stirling University. She complained about the evils of executive pay and suggested that instead of a minimum wage, we ought to enforce a maximum wage. The inequality crowd surrounding Berkeley economists Gabriel Zucman and Emmanuel Saez have long harbored such dreams. 

Employing standard economic reasoning, I asked her if that would not create a shortage and hamper competition: potential managers and executives may opt out of the market leaving us with worse-performing businesses or more poorly run institutions. The class scoffed at my naive, “neoliberal,” objection and the lecturer belittled me in a superficially respectable way. 

“Well,” she said, “I wonder what kind of market that would be. A very strange market, indeed.” At the time, I didn’t have a good example in mind. Then I learned about LeBron James and the NBA’s salary cap. 

And a strange market it is with what’s effectively a dominant single-employer colluding with majority-rule labor unions. For a good thirty years, the world’s premier basketball league has employed a maximum salary ‒ both for the team as a whole, and for any individual players (technically, it’s a “soft cap” as teams can go over it but have to pay a League tax in doing so). This levels out the distribution of wages for NBA players, in effect redistributing income from the best players to the mid- and bottom-players, and makes sure that rich teams and poor teams play on a somewhat even playing field. 

It also plausibly benefits the sport. Says Alex Blumberg of NPR’s Planet Money: “By making the economics of the NBA as anti-competitive as possible, you make the league as competitive as possible.” As the worst-performing teams get to draft young players first, they get literally game-changing talent on the cheap (and a lot more complicated rules employing countless auditors, lawyers, and agents). The game gets exciting, fans stick around, and the trophy isn’t monopolized by a few ever-dominant teams. 

After LeBron led the Lakers to victory this year, Ben Cohen in the Wall Street Journal wrote that “he’s not just the best player in basketball. He’s the best investment, too.” In a competitive market, having what’s perhaps the best player the game has ever seen play for you requires you to pony up ‒ a lot. Close to what he’s actually worth, which economically means what others are willing to pay for his basketball services. When LeBron joins your team, audience numbers go up; ticket sales rise; jerseys and merchandise sales rise. Not to mention that your team is now an instant contender for the trophy. 

Under NBA’s intricate monopsonist rules and salary caps, little of those benefits trickle down to LeBron himself. The team who gets LeBron pays a price well below his economic worth, which, even at $38 million a year, lets the Lakers buy even better players than they otherwise could have afforded. That is, the Lakers get a team with too good players, as the “LeBron rebate” can be used elsewhere. 

Instead of solving concerns about distributional outcomes, what maximum (and minimum) salary caps do is generate market inefficiencies that tilt the nature of the game. For basketball, that might not be so bad as it probably increases the value of the league as a whole; it operates as a rent-seeking guild, benefiting itself at the expense of us consumers. 

For LeBron himself, it’s not so clear that he gets a raw deal: thanks to sponsorships and endorsements, he earns another $50 million or so off the court ‒ money he could not have made had the NBA not allowed him fame in the first place. 

In a convoluted way, Prof. Dow was right; it does take a strange market for maximum salaries to work. Contrary to her beliefs, it’s wholly unclear that they translate well into more common markets. 

As for value, my friend’s mistake is to think that value is determined by the producer ‒ the economics profession hasn’t believed that for well over a century. The value of your work isn’t what you say it is; it’s what others say it is, and more so what they’re willing to part with to get that. Even without the particular NBA rules LeBron couldn’t stand up and say his basketball skills are worth a trillion dollars a year. That’s for others to decide ‒ team owners, managers, and fans ‒ not him. 

My friend’s “underpaid” skills are worth what her employer is willing to pay for them, bounded downwardly by what other employers are willing to pay (give or take some transactional or informational costs around that value). 

She can say her work is undervalued all she wants, but her actions ‒ and those of her employer and potential employers ‒ suggests that it’s not.

Joakim Book

Joakim Book

Joakim Book is a writer, researcher and editor on all things money, finance and financial history. He holds a masters degree from the University of Oxford and has been a visiting scholar at the American Institute for Economic Research in 2018 and 2019.

His work has been featured in the Financial Times, FT Alphaville, Neue Zürcher Zeitung, Svenska Dagbladet, Zero Hedge, The Property Chronicle and many other outlets. He is a regular contributor and co-founder of the Swedish liberty site, and a frequent writer at CapXNotesOnLiberty, and

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