I’ve recently finished reading a book called The Undercover Economist by Tim Harford. The book attempts to uncover the hidden truths of every day economic systems (though in fact it is more of a global economics 101) and is a very interesting read. It seems that a great many of the world’s situations can be explained by very basic economic principles such as scarcity or the principle of asymmetric information. For example Harford explains why it is impossible to find a good second hand car because the customer has no idea whether the car dealer is being honest about his claims of the quality of the cars he is selling. The fact that both parties don’t have all the information detriments both of them because the customer can’t tell which cars are good or bad and the dealer can’t convince his customer which cars are genuinely good value. In economic theory, markets work most efficiently when everyone knows everything there is to know about the entire market.
This got me thinking to an area where information is very thin on the ground: salaries. Why don’t people tell each other how much they earn? Why is it such a taboo subject? According to the theory if everyone knew how much their colleagues earned they’d be in a much better position to know what kind of salary they should be getting. Employers wouldn’t be able to offer unreasonably low salaries to people just because they don’t know how much they should be getting. Salaries should work on a system of supply and demand like every other market. If C# developers were paid twice as much as Java developers then people would train to fit the job that best suited their abilities and desired salary. At the same time the competition for jobs would drive down over-inflated salaries. Eventually the outcome - as with all free markets - would be that everyone was paid just enough to to be happy but not too much that someone else would offer to do the same job at a lower price.
Without knowing how much your colleagues are earning it is impossible to know how valuable the work you are doing is to the company. If a company wants people to work at their best they could offer benefits such as a performance related bonus. A lot of companies seem to have implemented bonus schemes without realising that unless employees know how much bonus they are getting or how much of the bonus is based on performance the bonus has no real effect at all. Also unless we know how large a bonus our colleagues are getting we have no method of relating performance to renumeration. The same reasoning explains why communism doesn’t work. If extra effort can only be seen as a benefit to others, no one will have a reason to try to perform any better than anyone else.
Perhaps a completely transparent salary might then encourage too much competition. People would threaten leave if they felt they were treated unfairly. In a work place it’s very difficult for anyone to have an objective opinion of their own or other people’s value as an employee. Perhaps a completely free market of workers would reduce the overall quality of work due to poor workers demanding the same salary as their coworkers or good workers continually switching from one company to another. Either way, all I know is that I’m not getting enough…