[sokoloff]

Markets are two-sided. If you pay a single, global rate, you may find yourself setting that rate such that you’re priced out of certain markets and lack access to money-motivated talent there.

You will be part of the market that’s eating it.

[dragonwriter]

> Markets are two-sided. If you pay a single, global rate, you may find yourself setting that rate such that you’re priced out of certain markets and lack access to money-motivated talent there.

Except for differences imposed by differential transaction costs, freely competitive markets have one price for a given good. If there's not a single, global rate for a nondifferentiated good, it means it's not a competitive market and a cartel or monopolist is imposing segmentation.

If there's some places where the supply (in the economic sense of the function relating price and quantity delivered) is restricted so nothing is delivered at the global market clearing rate, then that place just isn't a source of the good.

The benefit of segmentation for buyers isn't that they get to avoid being priced out of markets where you pay more for the same service, it's that imposing segmentation lets you reduce the price you pay to suppliers in low-cost regions to a level below the global market clearing price.

[sokoloff]

> If there's not a single, global rate for a nondifferentiated good, it means it's not a competitive market and a cartel or monopolist is imposing segmentation.

Much of the work of product development and marketing is creating differentiation (real and perceived). Is a Mercedes E-class different from Toyota Camry? Is 90% lean ground beef from Whole Foods different from 90% at Trader Joe’s?

Is economy class 21-day advance, Saturday night stay required travel different from a walk-up ticket out Tuesday back the same Thursday?

[dragonwriter]

> Much of the work of product development and marketing is creating differentiation

Sure, and that's definitely an important phenomenon, but it is not really germane to hiring for a role and paying differently for the exact same role depending on where the successful applicant lives.

[lotsofpulp]

> Is a Mercedes E-class different from Toyota Camry?

For this example, obviously they are different. The job of marketing is to justify the difference in price for whatever differences the Mercedes offers.

> Is economy class 21-day advance, Saturday night stay required travel different from a walk-up ticket out Tuesday back the same Thursday?

Yes, for the seller, guaranteed payment 21 days before is different than a volatile payment minutes before the goods expire.

[forrestthewoods]

> If there's not a single, global rate for a nondifferentiated good

I would say that software engineering labor is extremely differentiated?

[balhbloo]

This is fascinating. Where can I read more to learn more about how to think about economics like you?

[barry-cotter]

Any Economics textbook. Here are two good, free, technically demanding ones. Friedman’s is less demanding in terms of Mathematics than McCloskey’s.

https://www.deirdremccloskey.com/docs/price.pdf

http://www.daviddfriedman.com/Academic/Price_Theory/Price%20...

[balhbloo]

Hahaha thanks. I'm not smart enough to consider second order effects at this point. It's more of a personal crusade that I know is right so I'll just have to do it see what happens .

[lotsofpulp]

What will happen, unless your product is unique, in high demand, and has a large moat, is your customers will purchase from a competitor selling goods at a cheaper price. See what happened to US textile and manufacturing industry.

[balhbloo]

I suppose I'm idealistic to think that paying people more (what I think of as) fairly will better motivate them retain them and lead to better productivity. And also we'll be able to attract better people everywhere to produce better product. I could be wrong. Sad if so, but it's worth a try

[sokoloff]

Motivation is a complex topic to be sure. An argument that has always resonated with me (and I bring up mostly to see if we can find a good rebuttal here) is that if I’m paying someone wildly more than their second-best alternative, they are in part motivated (to keep the gravy train rolling) and in part trapped (“I better learn to deal with this, because I can’t go anywhere else without massive sacrifice for my family”).

The latter can lead to “I’ll quit mentally but not actually” which is horrible for all parties. (I’m not saying that’s an excuse to underpay people “for their own good”, but I think anchoring pay to an employee’s actual market makes some non-zero amount of sense.)

[lotsofpulp]

> An argument that has always resonated with me (and I bring up mostly to see if we can find a good rebuttal here) is that if I’m paying someone wildly more than their second-best alternative, they are in part motivated (to keep the gravy train rolling) and in part trapped (“I better learn to deal with this, because I can’t go anywhere else without massive sacrifice for my family”).

The rebuttal to this argument is that if you’re selling a commodity product, then you’re going to get steamrolled when Walmart/Amazon/Aliexpress/Multinational company comes rolling through and offers a comparable option to your product at 50% less by arbitraging labor costs.

[sokoloff]

I agree with that observation. I don’t understand how that rebuts the presumption that I should pay market wages to avoid trapping overpaid employees in jobs they don’t find fulfilling.

[ghaff]

It probably depends on what their intrinsic motivation related to the job is. Do they find it fun, mentally challenging (in a good way), etc,? If they're motivated in that way, the extrinsic motivation of above-market pay is probably a good thing. But if that's their only motivation and they'd rather be anywhere else if it weren't for the money, that's a negative.

[sokoloff]

100% agreed. My hypothesis (previously unstated) is that some slice of people who start out in the first bucket inevitably turn into the second bucket. (They get bored of "doing the same old thing" or they "just want a change".)

[barry-cotter]

All of the things you posit do occur. Costco employees are better, and better paid, than Walmart employees. That doesn’t mean both firms can’t exist in something close to the same market niche. And Costco’s strategy is not infinitely scalable. Paying more gets you better employees. It doesn’t automatically get you more profit.

[lotsofpulp]

There's a few segments of the customer market that will pay varying premiums for more customer service/quality, but only so much. Costco exists only in areas with above median wage shoppers, and can afford to exist by offering a limited selection of items sold in bulk. Similarly, a handful of retailers can afford to exist in this market, such as Trader Joes/Nordstrom/Apple/REI/etc, but most consumers are fairly price conscious and won't hesitate to shop elsewhere that offers lower prices. Or they can't afford the premiums for these places in the first place.

[lotsofpulp]

There is decades of data and sound reasoning to show what has, does, and will happen if arbitrage opportunities exist.

It’s no different than purchasing groceries from store A because they are cheaper than store B.

Paying people extra does not necessarily produce better product, at least not better enough to offset the extra costs.

If the goal is to give people a better life by giving them more money, that is better solved via wealth redistribution.