One-eyed free market. Why market-based job evaluation needs fixing

22.09.2018 | By Piotr Wójcik

The way wages are established, and income is distributed is an essential issue for every political community. In fundamental ways, the personal level of income defines the life of every human being and his or her participation in social life. Wealthier people can not only lead healthier and longer lives but can also afford to more intensely engage in community issues, thereby gaining more influence over them. In other words, it is pretty easy for them to translate their material capital into a political one. That is why it is very much crucial for the mechanism that determines the wage levels – and therefore also economic inequalities – to be as unbiased and just as possible. Today, we are very far from this ideal.

The mighty invisible hand of the market

In the contemporary free market economy, the earnings of virtually all professional groups are shaped by the market-based rules. To be sure, there exists a group of professionals who work in the public sector and are not so much impacted by them. In Poland, however, this is not a significant group, because – contrary to popular belief – Polish public sector is not that big. It is ranked as the eighth smallest in the EU and contains about 20% of the entire workforce, whereas in Great Britain – often cited as a model country in this respect – this share stands at… 25%. Also, market rules affect the majority of the wages in public sector, because institutions also have to compete for workers (while trying not to pay them too much) and any increase in wages in public sector is usually linked to the rise in wages across the state’s economy.

Thus, even if the wages of a quarter of people employed in public sector are not affected by market mechanisms (which is an overstatement), still an income of 95% people employed in our economy is the result of the market-based evaluation. Therefore, this mechanism in no small way affects the life of virtually our whole society, all the more so since we do not possess tax redistribution mechanisms (in Poland, taxes are flat, even regressive). One significant transfer redistribution programme (Family 500+) came into being only a year ago, but still, it is limited only to families with children. 27 years have passed since we enthusiastically embraced free market economy; it is therefore high time to ask whether the dominant job evaluation mechanism is as rational as it once seemed to be. If it is not, should not we try to fix it?

Wages in Poland are still staggeringly lagging behind the level of those in Western Europe. On average, an hour of work in Poland costs 8.6 euro, which is almost three times less than the EU’s average (25.4 euro).

This can hardly be compared with wages in France (35.6 euro) or Sweden (38 euro). Even if we take into account purchasing power parity (average prices in Poland constitute 56% of average prices in the EU), an hour of labour in Poland should cost 15 euro. According to the discourse that dominates the public sphere, lower wages in Poland are the result of the lower quality of work. Poles have lower productivity, therefore it is of less produced value, as productivity is the most essential factor affecting the level of income. Poles have to raise their qualifications. Thereby they will be able to catch up with the workers in the West. No surprise then that productivity is a result of work quality.

You get what you pay for?

The simple fact is that productivity in Poland is much lower than in the West. Based on the purchasing power parity (PPP), it now stands at 29 dollars per hour. Meanwhile, Norwegians produce a net worth of 79 dollars per hour, Belgians 65 and Latvians only 25. It quickly turns out then that linking productivity to the quality of work should at least raise doubts. Concerning the vast majority of occupations, it is hard to imagine how an average worker in Belgium could be twice better than an average worker in Poland, while a worker in Norway three times better than an employee in Latvia. Do Belgian nurses give patients medicine twice faster than nurses in Poland? Do Norwegian carpenters piece furniture together three times faster than Latvians? That is physically impossible. Take average workers employed in the West. Among them, there are a lot of people from our region. Is it possible that their productivity abruptly rises when they leave their countries and go to the West? According to the feedback from labour migrants, it is the other way round. Polish truck drivers working for German companies no longer have to exceed the maximum allowed speed or cheat on their work limits. The same goes for nurses in Scandinavia, who are no longer forced to take care of too large number of patients simultaneously.

That is all because, in the 21st century, productivity has little in common with personal work quality. When productivity level is high, one may even afford to relax and take it easy. First and foremost, productivity stems from technological advancement and the way the work is organised inside the company. It is also a result of a market-based evaluation of goods produced by the company. Finally, it depends on the overall assessment of goods produced in the economy of a state in which one is lucky (or unlucky) to work. Technically speaking then, productivity amounts to the country’s GDP divided by the overall number of hours of work across the state’s economy.

Due to this fact, an unqualified worker from a wealthy state will always be more productive than even the best professional from a developing one. The situation is even better for the workers employed in the well-established companies, because their productivity, it can be safely assumed, will be higher than that of those employed in a fledgeling business, regardless of the amount of work each of them performs.

Polish subcontractor in German production chain

Productivity, then, is a market-based value of our work. It would be interesting, however, to look at the way this evaluation is made. Poland is dominated by production plants that belong to the production chains of bigger companies and majority of these plants are in the hands of their subsidiaries.

Thus, sales of the goods produced here constitutes, in fact, a transfer of goods within one international company. The final price of these goods is de facto decided by the company itself, not by the free market. Take, for example, Volkswagen Poland. When it sells the products it made to the Volkswagen subsidiary in another country, they do not negotiate the price on a free-market basis. The final value of this semi-production is decided by Volkswagen itself, even if free market factors, such as prices of materials and energy need to be seriously taken into account.

Furthermore, the highest markup, that is the final profit margin is generally included in the final price wherever the company wants – most possibly in Germany. And that is why German productivity will be increased, while Polish productivity will only stem from the value of local factors of production. This low productivity, however, exists just on paper – it is not a result of work quality, but solely of the order in the production chain.

Therefore, it is hard to brush off the issue of low wages with the arguments about low productivity, since in economies that enjoy a high share of foreign capital, productivity, in large part, depends on the company’s policy of management of a product’s added value.

It should also be remembered that productivity affects our wages, but it does not determine them entirely. For example, the position of workers in the hierarchy of a particular economic model is an essential factor here. In wealthy countries with a well-established free market economy, workers were able to make a place for themselves and get a more significant piece of the pie. For example, based on PPP, productivity in Poland per head amounts to 65% of productivity in Sweden and 64% of that in Austria. Average wages should mirror this ratio. However, based on PPP, annual salary in Poland is 20 thousand euro, which is 54% of the average wage in Sweden (37 thousand) and 49% in Austria (41 thousand). Where are the missing percentages? Salaries are a result not only of productivity but also of the culture of income redistribution and of the level of involvement of workers’ unions which are capable of efficiently negotiating with employers and authorities.

The executive earns 354 times more than a rank-and-file worker. Why?

It would be worthwhile to think whether the judgments of the free market concerning job evaluation are rational, well-founded and just because in many cases, they seem to be downright absurd. For example, in 2016, the CEO of Citi Handlowy Bank, Sławomir Sikora, earned 5.4 million zlotys, which amounts to approximately 450 thousand zlotys a month. His salary was therefore about a hundred times higher than the salary of an average fireman. Is it possible that the work of CEO Sikora was a hundred times more valuable than the job of a fireman? Why is it that the rational market allowed for a situation when a bank CEO earns as much as one hundred firefighters? And keep in mind that Poland is not the worst place for workers. In the United States, the average income of CEOs is 354 times higher than the salaries of their employees. Is it possible that the value of a CEO’s work was 354 times higher than the value of the average employee’s job? There is no reason to believe that. To the contrary, there exist multiple studies which find that the influence of a CEO on the functioning of a company is highly overestimated. For example, according to Daniel Kahneman, a laureate of the Nobel Prize in economics, even the best chief executive can increase the likelihood of his enterprise’s success by only up to 10%. It means that the CEO himself can raise the chance of success from 5 out of 10 to 6 out of ten cases. Why is it then that the ostensibly rational market allowed for such an unjustified job evaluation of one professional group?

One-eyed free market

It turns out, then, that market is not an unbiased or just job evaluation mechanism. Above all, it does not recognise the social utility of many important professions, such as a nurse, fireman, teacher, public transport driver, or even sanitary worker.

In every country, these professionals belong to the middle-income groups at best, although their social utility is much higher than that of financial sector workers, corporate lawyers, or tax advisors who help with tax optimisation and can usually expect to be paid lavishly. Besides, behind every market decision there, in fact, stands a bunch of people who are not wholly rational and have vested interests in particular outcomes. For this reason, job evaluation of professional groups which are strategically important for the market is so inflated. Take, for example, the financial sector. It controls immeasurable amount of money circulating in the economy, and that is why it can boast disproportionately high wages compared to other industries. Executives have a lot of opportunities to mould their salaries, and many board members take advantage of it by granting premiums to themselves. For this reason, even the most courageous and competent fireman with hundreds of successful interventions to his name will always earn significantly less than an ordinary bank manager.

Towards a new social contract

As can be seen, the judgements of the free market concerning job evaluation are often irrational and unjust. One of the prime challenges concerning labour in the 21st century should be the rethinking of the way it is evaluated. One of the factors taken into account could be the criterion of social utility. It would help many professions that are now unappreciated and could foreclose the formation of castes that earn the amount of money unthinkable for the majority of people in society.

The market mechanism should, of course, be preserved. However, it has to be supplemented with corrective tools, for example, fiscal ones. They would be responsible for lowering the highest incomes and for funding transfer mechanisms, which would hand a “social bonus” to the professional groups whose work is unappreciated but immensely crucial for the society.

The income acquired from progressive taxation of high profits could be stored throughout the year in a special fund. Every January, the workers of professions particularly essential for the community (e.g. nurses, firefighters, sanitation workers, dustmen) would be handed “13th month pay”.

Finally, these mechanisms should award labour that is not valued at all, e.g. raising of children by unemployed mothers or taking care of the elderly or disabled members of the family. They could, for example, consider the form of monthly remuneration transferred by the state to the mother or the father who raise the kids while keeping house. This remuneration would depend on the number of dependents (not necessarily exclusively one’s own) and the income level of a spouse.

Women in Poland perform 296 minutes of unpaid labour daily, which is the eighth result among OECD countries and fourth among EU’s members of the OECD. Women in Sweden perform only 207 minutes of unpaid labour and those in France 233 minutes.

Finally appreciating the work of those who are underestimated or not rewarded despite the huge social usefulness of their tasks, should be a priority for the next period of “work on work”. Since the judgments of the market are really decisions of specific members of society, there is no reason to claim that they are more justified than a joint decision in the social contract.

Translation from Polish: Łukasz Gadzała

 

This publication has been cofinanced by the Ministry of Foreign Affairs of the Republic of Poland within “Cooperation in Public Diplomacy 2018” programme.
This publication reflects the views of the author and not the official stance of the Ministry of Foreign Affairs of the Republic of Poland.

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