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There are only two ways to make money... do what no one else CAN do, or do what no one else WANTS to

ChrisV

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This is a great quote from Freakonomics on how the market value of a job or service is calculated. Keep this in mind during all your business ventures.

These budding drug lords bumped up against an immutable law of labor: when there are a lot of people willing and able to do a job, that job generally doesn’t pay well. This is one of four meaningful factors that determine a wage. The others are the specialized skills a job requires, the unpleasantness of a job, and the demand for services that the job fulfills.

The delicate balance between these factors helps explain why, for instance, the typical prostitute earns more than the typical architect. It may not seem as though she should. The architect would appear to be more skilled (as the word is usually defined) and better educated (again, as usually defined). But little girls don’t grow up dreaming of becoming prostitutes, so the supply of potential prostitutes is relatively small. Their skills, while not necessarily “specialized,” are practiced in a very specialized context. The job is unpleasant and forbidding in at least two significant ways: the likelihood of violence and the lost opportunity of having a stable family life. As for demand? Let’s just say that an architect is more likely to hire a prostitute than vice versa.

In the glamour professions—movies, sports, music, fashion—there is a different dynamic at play. Even in second-tier glamour industries like publishing, advertising, and media, swarms of bright young people throw themselves at grunt jobs that pay poorly and demand unstinting devotion. An editorial assistant earning $22,000 at a Manhattan publishing house, an unpaid high-school quarterback, and a teenage crack dealer earning $3.30 an hour are all playing the same game, a game that is best viewed as a tournament.
Essentially the market value for a service or job is calculated by the following questions:

Is there a demand for this skill?
Can people do this themselves?
Do people want to do this themselves?

It’s sometimes helpful to ask yourself “what can I do that no one else can do?” Otherwise you have to do the things no one else wants to do.

Those questions are just as important as questions about demand. How bad do people need this service? Ever wondered why Doctors and Lawyers make so much money relative to other professions? Think about it... why does a Doctor/Lawyer make more than, say, a dog walker? Simple. Doctors and Lawyer literally save lives. You hire a doctor or lawyer when you’re about to die or when you’re about to go to jail for a very long time. Or you may hire a lawyer to ensure you’re following the rules properly, to ensure you don’t go to jail for a long time. Point being: when hiring a doctor or lawyer, the stakes are much higher than your dog pooping in the carpet. Demand is high. People are willing to pay $180,000 for a life-saving surgery or $120,000 for an attorney that will keep them out of prison. You’re not going to pay over $100,000 for someone to give your pooch a walk. Real Estate is another highly profitable business. Why? People need a roof over their heads. So people are willing to part with tens of thousands of dollars per year just to keep a roof over their head. All these things represent very basic needs, that are on the most fundamental rung of Maslows hierarchy.



Anyway, these are just a few things to keep in mind when creating businesses. It’s very helpful to know how market values are calculated in order to tap into those markets.
 

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Andreas Thiel

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Not sure if I like the studies that were performed and what the conclusions are supposed to be.
How do you take all the relevant facts into account in such complex situations with macro developments, competing incentives where anything can be cause or symptom ...?

The anecdotal verdict is: companies do everything they can to pay as little as possible if people do not push back.
There are many people that do the work that nobody wants to do and they get nothing out of it.
Many people in Germany do the same job they did in the past, but they are now hired through agencies for temporary work for insulting wages.
There is need, but the job center makes it clear that you are only entitled to social insurance benefits and pension when you accept any kind of work that you can physically do.

I am sure Germany has only caught up with the US in that regard.
Sure, people should know better ... but that is what the book UNSCRIPTED talks about. Everybody is being mislead and then the job market adds insult to injury.
Not all business owners / managers are to blame, but race-to-the-bottom dynamics lead to pressure to exploit people and there are some companies that use the wage parameter for a step towards overcapitalism.

Freakonomics is a book that I definitely have studied and will get back to. It completely changed the way that I think about economists.
Love the idea that incentives are tools ... and that you can influence anything by thinking in terms of incentives (the military example about how to prevent riots).
We need better ones (economists and incentives).
 
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ChrisV

ChrisV

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companies do everything they can to pay as little as possible if people do not push back.
Yea, and people won’t really ‘push back’ unless they have other options. Your wage is a bid. They’re gonna pay you as little as possible to get you from leaving. Which is okay, because you would do the exact same. You try to get the lowest prices possible on your goods/services too. Wages are bids. So for example, a Janitor might want a raise. But he won’t quit unless he has a better offer somewhere else. If he’s making 25K at company X, but has an offer for 26K elsewhere, he’s in a position to say to his employer “hey bro, you better pay me better or I’m gonna leave.” But if he doesn’t have another offer or no one is willing to pay the much, he’s not in a position to stand up for himself. He’s gonna say “Pay me more or else I’m leaving!” when he doesnt have another gig lined up, they’re gonna say “okay, then leave bitch,” and then just hire one of the other 5,000,000,000 people on the planet that can do the work of a janitor. Now if you’re a brain surgeon, there might only be 100,000 people in the world who can do that job, so you’re in more of a position to negotiate.

Willingness applies too. If the job is cleaning septics, maybe 5,000,000,000 people can do it, but only 2,000,000,000 people WOULD do it (doing work on septics actually pays pretty damn well in comparison to jobs of similar skill levels.)

And how in demand a service applies too. Someone may be an absolute master at stitching warm fuzzy quilts with a pictures of Elon Musk on them, but if there’s not a demand for that service, no one’s gonna pay him for that.
 

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