Wage differentials vs. productivity differentials, continued

Tyler Cowen asks,

Aren’t the waiters more productive *because they are serving wealthier customers*?

Gosh, that throws an even bigger monkey wrench into the whole deal.

Let me switch examples. Suppose that Jeff Bezos can either rely on Uber or else keep a personal driver on call. Suppose that the personal driver gets a higher wage than an Uber driver, just because Bezos can afford to pay a higher wage. Then if Bezos switches from Uber to the personal driver, measured GDP goes up, but our intuition is that productivity has not changed.

From a neoclassical viewpoint, my example is a swindle. In a neoclassical model, a wage is determined in a competitive equilibrium, not by Bezos being able to “afford to pay a higher wage.” What should happen in my example is that drivers compete with one another to become Bezos’ personal driver, until the wage gets driven down to the Uber wage.

Back to Tyler’s example. Would waiters earn higher wages in zip codes with wealthy customers than in zip codes with middle-income customers? From a neoclassical perspective, the answer should be no. If wages are higher in wealthy zip codes, then waiters should compete to work in those zip codes until the differential disappears.

My guess is that this is not how it works. Instead, my guess is that waiters compete on quality, and the wealthier customers get the higher-quality waiters. In some sense, the wage differential does reflect a productivity differential. But it is a productivity differential that is inherent to the individual. There is no opportunity for zip-code arbitrage.

That is, if you moved a waiter from the moderate-income zip code to the wealthy zip code, you would not be raising productivity overall. You would be bringing a low-quality waiter into a zip code where the expectation is for high-quality waiters.

I worry that Tyler may have a different answer in mind. And I worry whenever I engage in casual neoclassicism.

Earlier this week, I had dinner in Newport News, Virginia. Our waitress took the orders for are party of 9, including special instructions, without writing anything down. She was one of the highest-quality waitresses I have ever observed. But she was not working in a wealthy zip code. If she moved to New York or Los Angeles, my guess is that she could get paid a lot more. But taking into account the cost of living, she is likely just as well off in Newport News.

14 thoughts on “Wage differentials vs. productivity differentials, continued

  1. I told someone this week that the work being done was 70% paid, 30% volunteering – which is to say the compensation was coming in non-market forms, perhaps…

    I wonder about that. Are the waiters more productive per unit wage in a wealthy place because atmosphere (among other things) is also compensation?

  2. Do you think Jeff Bezos cares enough about the driver to invest much effort in choosing the best driver at the lowest rate? I expect Bezos would satisfice- he’d pick the first driver that met his basic standards of competence, and he’d pay an above-market wage to prevent turnover (which is annoying).

    • Or, more obviously, “personal drivers for billionaires” are not competing in the same part of the [sub-]market as Uber drivers, any more than Olive Garden is competing in the same sub-market as Del Posto (NYC). Nor would the typical Uber driver be well-received as a Bezos-level personal driver. Is there a lump-of-driver or lump-of-waiter fallacy here?

      • Possibly. I don’t know Jeff Bezos, and it’s possible that he needs a driver with the discretion and skills to get rid of a trunk full of dead hookers at the end of the night and keep his mouth shut. It’s much more likely that he just needs a moderately competent driver in a society where most adults are moderately competent drivers.

  3. Think clerks are Wal Mart v. Cosco or any other similar example ( at one time I could have said Home Depo).

    There is a difference. Cosco is only in wealthy areas, and because of better margins, higher sales or whatever, can afford better clerks and its customers expect better clerks. Generally the clerks at Wal Mart could not get a job at Cosco. Wal Mart’s customers put up with worse clerks because of a number of factors.

    Waitpersons comp generally depends on the ticket size. So when you spend more on a meal you get a better paid waitperson, and likely a better waitperson. Within most metro areas, there are higher priced and lower priced places.

  4. Yes that driver would be more productive. Bezos could rely on a measure of confidentiality, discretion, and security that could not otherwise be expected. Productivity is not about widgets, but about the creation of value and value takes many forms. But no, this does not mean there is an arbitrage opportunity.

    • This sounds right to me. Let’s say the new driver saves Bezos on average 0.1% of his time each day (it would be wrong to assume Bezos would just pick *any* uber driver, he would likely select one of the more skilled with some kind of process), and also decreases the risk of an embarrassing leak by 1%. Surely that’s value creation for Jeff Bezos, and given how highly the market has valued Bezos’ time and effort, value creation for the market as well. But notice that confidentiality also means this is a slightly different job; a skill that you really don’t pay for or expect in an uber. I think that is an important distinction between this example and a waiter. To the extent the waiter must be trained similarly in the wealthy area, it does increase productity. If the job is the same and no training is required, I would suspect you’d see no huge difference in disposal income / overall net quality of life. (Local “equivalent” waiters as an aggregate, given demand would be constant and supply increased, would see themselves slightly worse off; wages would get a slight bump down and RE prices would get a slight bump up). In other words, you can’t argue about productivity by just considering the single waiter. You have to consider their effects on other waiters in each area (where they leave and where they land).

  5. There are expensive zip codes, and there are expensive metros. I live in one of the expensive metros.

    Here, there is a significant shortage of wait staff across all price spectrums. It limits the opportunities for restaurants. Of course the more expensive places get the better staff, but everyone has problems with staffing, including the high end. It actually constricts the restaurant market here.

    My experience is that because demand greatly exceeds supply, the overall quality of wait staff here is not any better at all. It is the same for all trade jobs. The market just deals with the restraints.

    The amount of change here that would be required to make the sub $100K job market actually draw in newcomers would be staggering. Families several levels up the ladder have a tough enough time already. There will never be affordable housing here ever again.

  6. Yes, lot of monkeys on this wrench. Dining out is heterodox, what does it mean? The ways of dining out are not comparable, each method serving a different purpose. Then the typical food server; from MacDonald’s academy or experienced in high end serving? Nightmare stuff, I can’t make heads nor tails of it.

  7. With respect to waiters the productivity question is better considered if one thinks of the product as ‘sales, and customer satisfaction’, rather than as ‘information processing, and platter relocation’.

  8. I’ve been wondering about the hyped move toward services over manufacturing in the US economy. Increase in individual worker productivity in services is limited compared to manufacturing. Thus wages will stagnate, except as the minimum number of workers are able to improve their service quality and find better clients.

    A skilled waiter can serve a lot of tables in the low cost breakfast place or they can serve fewer tables, due to customer lingering, at a higher quality as the restaurant type improves. Similarly for doctors, nurse, dentists, dog walkers, even Uber drivers. The addition of a machine and some automation can dramatically increase the productivity of a manufacturing worker.

  9. When they decide what to do and where to live, workers of whatever quality don’t make decisions on the basis of nominal wages alone. Far from it.

    On average they make decisions on the basis of what you could call utility and welfare, which includes the quality of life, standard of living, or maybe even some instinct for the “expected net present value” of welfare over one’s entire lifetime. Let’s just call this value “worker happiness” (WH).

    Workers don’t want to move to places where they can be “more productive” (however you want to define it.) They want to move to places where they can achieve higher WH.

    Even assuming some big and persistent rent disparities between locations, labor is mobile enough that on average and in the long run we would expect an equilibrium not of factor price equalization, but where workers allocate themselves such they are are indifferent between locations, because the different wages they can obtain for the quality of their output, and the elevated costs of lots of other things, transform into the same amount of WH.

    And it’s hard to tell what happens to WH if someone then suddenly relaxes building regulation restriction in priceyville. Rents will fall, some additional workers would move in, but then wages would also fall, and why should we expect the new equilibrium to have a significantly different transformation of local wages to WH than it did before, that figure being, after all, the root cause of decision-making?

    In fact, it’s really hard to judge the impact of cost of living differentials on worker quality. One would have to assume that basically every important economic factor remains in proportion, which is certainly not true. It could be that just an extra dollar per hour buys a lot of additional service quality in cheapland, and that the character of local demand is willing to make that trade-off.

    Whereas in priceyville it would take two or three dollars per hour extra, which would raise the cost of already expensive output more than what the local market is willing to bear, at least in terms of some optimal quantity produced. In my experience, mass-franchise or chain operation locations in expensive cities tend to sacrifice service quality as a coping mechanism to keep prices low. And so one ends up much more likely to encounter a lot of surly, grumpy, unmotivated, any otherwise low quality service workers at the customer-facing level in these cities than in cheaper locations.

    Many of those ‘proximate services’ I’ve been writing about here in the comments to other posts necessarily have real estate costs as a price origin of direct and indirect costs for any enterprise, both in the rent the company must pay for its physical storefront, and for wages which allow local workers to pay their own rents. In my own experience, to get really good quality service in expensive American cities causes the prices of equivalent items in nice bars, restaurants, coffee shops, etc. to rise at least if not more than/i> proportionally to different real estate prices. Yes, this is hard to untangle from what people are paying for a certain mix and status-level of fellow patrons, but I think the excess service quality premium is a real feature of the marketplace.

    As for the original question involving the rhetorically appropriate use of the work productivity in the context of locations with significant rent differences (and thus different wages and costs of living), this is one of those instances in which a picture is worth more than a thousand words, and it would be useful to be able to sketch out some supply and demand curves to illustrate the point.

    Finally, since tax policy has been in the news lately, it’s worth asking whether the insensitivity of progressive tax rates and brackets to local costs is appropriate. Someone earning $100K per year in Bismarck, South Dakota is enjoying a much richer lifestyle than someone in the heart of San Francisco. I would argue that there is a kind of justifiable folk instinct that marginal tax rates shouldn’t start to increase significantly until someone starts being “rich” or “upper class”, that is, after someone has achieved the income necessary to afford a decent kind of “American Dream” comfortable middle class family lifestyle, to include adequate provision for retirement, etc. That’s kind of the logic for where the 25% rate starts for “married filing jointly”, about $76K of annual income.

    But maybe it would be fairer for the 25% federal rate to start at $50K in Bismarck and $100K in San Francisco. Don’t tell the progressives, they’ll start running on Blue City Tax Fairness in the next election and find another way to juice their supporters for many more donations.

    • Good explanation of the tradeoffs.

      I would only push back on the idea that relaxing building regulation restriction in priceyville will lower prices any time soon. These places aren’t Houston. In the absence of set asides, housing starts will be higher margin for many years until demand cascades down to even middle class level opportunities. There would have to be very significant commitment to greater density policies across the board for decades to move the needle in San Francisco, Boston or New York.

  10. I’m a little late to this discussion, but I think I might have a way of looking this question I haven’t seen so far:

    To what degree do higher wages in, e.g. San Francisco, reflect higher productivity vs Economic Rents collected by the worker but just passed on to property owners and only due to land use restrictions?

    Basically, I’ve been thinking about this as a multi-stage production process, with a worker turning housing (and other inputs) into labor. Also thinking about lattes as a non-tradeable good, so a latte in SF isn’t necessarily the same as one in Bakersfield in a real sense.

    I think Handle has raised a very interesting question, and I think he’s right that people have been talking past each other a lot. His latest post in terms of Worker Happiness seems to have moved things forward. I’m trying to put this in a more standard economic model, though I’m not quite there yet.

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