“I deserve more money! I work so hard!”, shouts the angry teenage worker. She’s an EMT, and she’s going on six months on the job. “You have so much experience,” she’s often told by even fresher EMTs who are hired by her private ambulance company. This EMT – let’s call her ‘Mary’ – believes that she deserves much more than the $11 per hour she is being paid. She took a four-month course to get her EMT card, she drives ambulances, lifts patients, comforts the ill, and literally saves lives! Mary wonders why she barely makes more than her friend Jennifer who works at McDonald’s. Mary has a higher IQ, spent more money in school, got an EMT card, and does the most noble of work. So, why doesn’t she make more money? Is her boss evil or greedy?
Enter: value production
Education, degrees, noble work, and everything else all pale in comparison to the king of all factors affecting salaries: value production. No matter how many degrees you have (many of the EMTs at Mary’s company have multiple advanced degrees – and still earn only $11/hour), a business will only pay you relative to the value you produce or provide. Doctors are very valuable because they provide a very expensive service, which is why they earn a nice living. NFL players are paid handsomely because they earn billions of dollars for their teams and for the league by filling stadiums and getting millions of Americans to watch them on TV.
Of course, the harder one works, the more skilled they become, and the more valuable they could become to an employer. Make no mistake; Aaron Donald (one of the most dominant defensive players in NFL history) earns 300 times more than Mary and he does happen to work at least 300 times harder than Mary, but this does not necessarily have to be the case. Taylor Swift may not work 500 harder than you, but she earns hundreds of millions because she sells out stadiums and earns millions by licensing out her music. No, she did not get rich by taking advantage of anyone. That’s not how it works.
While health care billing is extremely complicated (and largely corrupt and controlled by the federal government), when EMTs transport a patient via ambulance, their employer cannot bill the patient nearly the same amount as they could if a paramedic transported that patient on a ventilator, cardiac monitor, and IV infusions. Because paramedics are able to earn much more money for the private ambulance company, they are more valuable. Because they are more valuable, they can demand to be paid more money. If an EMT could do calls twice as fast as his counterparts, he could make the argument that he should be paid roughly double the amount of his counterparts. If he could magically provide services to patients that are billable for $87,000 per call, he would earn much more than he currently does. Because doctors can and do bill at much higher rates than paramedics, they earn much more than paramedics do. Because neurosurgeons bill quite a bit more than family doctors per hour of patient care, they earn more than family doctors.
If you had the skills to guarantee that the Patriots win the next five super bowls, you would earn millions of dollars per year, because you’d be providing a lot of value to the team.
The same exact principles apply to producers of actual goods. If you built plastic pistol holsters that people were willing to buy for $20 each, you would make some money for yourself. Your profit margin might only be $8 per holster due to the cost of materials, machines, employees, and advertising, but you’d be earning money. If I spent the time and money learning leather-crafting, bought leather, and bought the necessary tools to make beautiful custom leather holsters and sold each one for $40 and earned a profit of $17 per holster, I would be earning more money than you. Would that make me evil? Would that make life unfair? Many people would certainly consider this to be an example of free market capitalism being an evil failure.
Provide value with your products or services and you’ll earn a corresponding amount of money. Want to earn more? Provide more value.
Is it starting to make sense?
Scarcity: supply & demand
Partially related to value production is the concept of ‘supply & demand’, which is generally a significant factor in determining wages in a given market. Mary the EMT might not realize this, but the entire US is pretty saturated with EMTs compared to the demand (which remains high, as well). Due to companies having a fair amount of choice, they do not need to desperately solicit and attract EMTs. If she were to move to Alaska, she might find that the demand for EMTs is so high that private companies would pay her twice what she makes in New Hampshire!
This same rule applies to products, just like it applies to workers. Of course, the more scarce a given product is in a given region, the more valuable and expensive it becomes.
This rule applies to dating, too. The more attractive the woman, the more choice she has when selecting a partner. This makes it quite difficult for each individual man to successfully win her over. Supply & demand governs nearly every transaction in society, and it should. The alternative to a demand-based market is an authoritarian communist government-run economy like North Korea’s.
Risk vs reward
While not extremely important for determining most people’s salaries, this principle does help to explain why some professional athletes, entertainers, and entrepreneurs earn as much as they do. From Luke Bryan to Tom Brady to Jennifer Telfer, people often take big risks for the opportunity of a big reward.
Instead of choosing the safe route of college or a simple job, Luke Bryan chose to pursue singing country music. His big risk paid off, and he’s made hundreds of millions of dollars (Forbes estimates his annual earnings at over $42 million now). I’ve seen his concerts. He’s closer to pop than he is to country if you ask me, but he’s talented and works his butt off. And millions of music fans pay real money to listen to his music. And they do so voluntarily without being coerced one bit.
Tom Brady works like a machine, spending nearly every waking moment training and/or studying football. Despite being selected 199th overall in the NFL draft, he continued to work insanely hard to constantly improve as a football player. He risked it all to be a professional athlete who could provide his family with whatever they needed. And his risks paid off. He is the only quarterback to ever win six superbowls and he has earned $235 million over his 20-year NFL career and millions more via endorsement deals. Anyone who believes that Brady doesn’t deserve the money he earned is simply a fool. He earned it. And no, his making lots of money does not mean that there’s less money for you to earn.
Jennifer Telfer took a huge risk when she invested in her startup company after discovering that her son had flattened one of his stuffed animals from using it as a pillow for so long. As a result, ‘Pillow Pets’ has earned Telfer $100 million to date.
Mary might consider taking a bigger risk if she finds a great opportunity. Such a risk could increase the amount she earns.
What about education?
The age-old debate about college fits perfectly into this discussion. If you believe that college will increase your value by training you to provide more valuable services and/or create more valuable products, you should go to college. If you believe that you are better off keeping the money that would have gone towards tuition and instead working, gaining experience on the job, or investing your money in a business, you should definitely skip college. In his super-data-heavy book, Professor Bryan Caplan found that college degrees in the practical fields of study do increase lifetime wages for the graduate, but not for society at large. The reason seems to be that a degree ‘signals’ conformity and work ethic to a prospective employer who does not have the time to learn everything about every applicant.
If Mary obtained a paramedic certification, went to grad school to become a physician assistant, or became an accountant, she would surely earn more than she does now.
In summary, if you would like to earn more money, look inwards before blaming others. How much value do you produce with your service or product? How could you increase that figure? Could training improve your skills? Next, consider the market you are in. Changing regions or industries could give you a more advantageous position on the supply vs demand spectrum, which would result in a higher salary. You could also consider taking a risk and starting that company if there’s a great idea that you’ve been sitting on for a while (maybe I WILL start that holster company!). You might also consider getting more training or education if you want to become a more valuable earner. Most importantly, keep in mind that in a truly free market, one’s success is a net positive for the economy and community, so earn as much as you can!