Ok everyone, pay attention, because Stuart’s line in the middle panel is actually really important. Understanding the concepts behind what’s happening in this fictional-but-only-barely example and what happens in the real world might save your employment, influence your career decisions, or explain why you may not have gotten a job you thought you were perfect for.
Marla thinks with her heart.
The Gadget City CEO thinks with his bonus.
Stuart thinks with his enshrined VP-autographed copy of the Grumble’s Employee handbook.
I’m going to ask you to think like an economist.
An economist views jobs, salaries, and productivity through the lens of a math equation. An employee adds value (V) to the firm and is paid a wage (W). The difference between the two (V-W) is the amount of profit (P) gained from buying an employee’s labor. Logically, as an employee gains experience with the company, they will expect their wage to rise, but that will also increase their value to the firm. W increases, V increases.
But what happens to P?
If an entry level employee is able to contribute 100 value to the firm and is paid a wage of 50, the profit to the firm is 50. If after 3 years of experience, that employee is able to now contribute 150 value at a wage of 100 or less, it makes sense for the firm to retain that employee. Equal or greater profit for the company, higher wage for the employee. Everyone wins.
However, what happens when, like so often happens in retail, just gaining experience doesn’t lead to greater value to the firm?
Same example as above: an entry level employee contributes 100 value, makes 50 wage, profit to the firm is 50. Now it’s three years later, and an experienced employee only brings 120 value. Economically speaking, the most the firm would be willing to pay would be 70, because any more than that, and the firm makes less profits on the experienced employee’s labor than they would if they hired an entry level employee at 50.
This seems reductive. And unfair. And shortsighted. And it’s yes to all three. But it’s also a mathematical and economic reality, and it exists outside of retail too.
In the consulting world, most new hires are recent graduates. The big 3 consulting firms hire them by the hundreds every semester. These new hires work for two years, and then it’s either up or out for them. Either they move into a higher role, bringing more value to the firm, or it’s time to find a new job.
I’m not saying it’s right or wrong. I’m not saying it’s moral or immoral. I’m not even saying it’s the correct business strategy. It’s MATH – and if you work for a large corporation in any capacity, you’d better believe that the finance department is doing that math on your role. If you understand what value you bring to the company and how much they profit on your labor, it can tell you that you’re right where you belong, or that you need to renegotiate your compensation, or it may tell you to get your resume up to date.
Sounds so familiar.
Ok everyone, pay attention, because Stuart’s line in the middle panel is actually really important. Understanding the concepts behind what’s happening in this fictional-but-only-barely example and what happens in the real world might save your employment, influence your career decisions, or explain why you may not have gotten a job you thought you were perfect for.
Marla thinks with her heart.
The Gadget City CEO thinks with his bonus.
Stuart thinks with his enshrined VP-autographed copy of the Grumble’s Employee handbook.
I’m going to ask you to think like an economist.
An economist views jobs, salaries, and productivity through the lens of a math equation. An employee adds value (V) to the firm and is paid a wage (W). The difference between the two (V-W) is the amount of profit (P) gained from buying an employee’s labor. Logically, as an employee gains experience with the company, they will expect their wage to rise, but that will also increase their value to the firm. W increases, V increases.
But what happens to P?
If an entry level employee is able to contribute 100 value to the firm and is paid a wage of 50, the profit to the firm is 50. If after 3 years of experience, that employee is able to now contribute 150 value at a wage of 100 or less, it makes sense for the firm to retain that employee. Equal or greater profit for the company, higher wage for the employee. Everyone wins.
However, what happens when, like so often happens in retail, just gaining experience doesn’t lead to greater value to the firm?
Same example as above: an entry level employee contributes 100 value, makes 50 wage, profit to the firm is 50. Now it’s three years later, and an experienced employee only brings 120 value. Economically speaking, the most the firm would be willing to pay would be 70, because any more than that, and the firm makes less profits on the experienced employee’s labor than they would if they hired an entry level employee at 50.
This seems reductive. And unfair. And shortsighted. And it’s yes to all three. But it’s also a mathematical and economic reality, and it exists outside of retail too.
In the consulting world, most new hires are recent graduates. The big 3 consulting firms hire them by the hundreds every semester. These new hires work for two years, and then it’s either up or out for them. Either they move into a higher role, bringing more value to the firm, or it’s time to find a new job.
I’m not saying it’s right or wrong. I’m not saying it’s moral or immoral. I’m not even saying it’s the correct business strategy. It’s MATH – and if you work for a large corporation in any capacity, you’d better believe that the finance department is doing that math on your role. If you understand what value you bring to the company and how much they profit on your labor, it can tell you that you’re right where you belong, or that you need to renegotiate your compensation, or it may tell you to get your resume up to date.