Economics 101: Wages reflect revenue a job generates, but the GCC is special
What determines wages in the GCC and elsewhere?

Under normal circumstances (the GCC is not included; see below), a company agrees to pay you a wage for one reason only: the tasks that you perform generate revenues for the company. It can be direct, such as when a sales assistant sells a company’s product on its behalf; or it can be indirect, such as when an IT technician fixes the computer that the sales assistant uses.

Note that the revenues that your efforts generate are not the same thing as how hard you work: we can all work very hard digging holes but that does not create revenues for companies.

Similarly, not all educational qualifications generate revenue equally: a doctorate in English literature might be intellectually more demanding than an accounting diploma but the latter typically contributes much more to a company’s revenue.

The revenue that your efforts produce for the company places a ceiling on how much it is willing to pay you; if you earned a higher wage than that, then employing you would make the company lose money. That ceiling might be further pushed down by the presence of competing workers: if someone else is willing and able to do what you are offering, but for a lower wage, then the company will not hire you for a higher wage.

On the flip side, most tasks you offer to do for a company are inherently unpleasant compared to watching television or reading a book, and so you are only willing to do them if the compensation is sufficiently high. And the floor in your wage demands for a certain position rises when another company is willing to pay you more for the same job.

The wage that you end up earning will lie somewhere between the company’s ceiling, which is a function of your productivity, and the ease with which the company can find someone else to do your job; and your floor, which is a function of your alternatives to working, including leisure, and the amount that others are willing to pay you to do the job.

Thus, if you think that a certain job pays a lot less than is fair, then that is most probably because of a combination of two reasons: first, the tasks performed by the worker do not create substantial revenue for the company; and second, lots of people are willing and able to perform the job at a low wage. That is why nurses earn such modest wages, despite the fact that they save lives. Conversely, cosmetic surgeons earn high salaries because they generate a large revenue for the hospital, and because very few people have the necessary skills.

Similar factors explain cross-country wage differentials: the reason that a programmer working in the US earns more than one working in India is that the US-based one is much more productive – he or she has access to superior software and the company is producing output that is much more valuable – and because the Indian-based programmer faces a lot more wage competition from other programmers.

Do notions of fairness ever matter for wages? Typically, no, unless they affect productivity directly. For example, having large wage differentials within an organisation might damage morale and therefore lower productivity. That is one reason why companies prefer to keep wages secret!

The GCC is special because the governments employ more nationals than do businesses. Most public sector organisations, such as police forces, do not have a conventional revenue, meaning that managers have much more discretion in determining what pay an individual merits.

Moreover, one of the governments’ explicit goals is to raise its citizens’ living standards by providing them with secure jobs, even if their pay might exceed what can be justified by the market value of the tasks being performed.

August 2017
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