Thursday, June 01, 2006

Workers in a competitive market are paid according to the value of their marginal product

In competitive labor markets a worker gets paid the value of the worker's marginal product, that is, the value of the additional product the worker's presence provides.

There is a link between several of the recent posts at The Emirates Economist.

1. Customer-based discrimination: The notion that customers may be willing to pay more for an enterprise's service according to the nationality or ethnicity of the employee providing the service.

2. The debate over Western style education systems in the Gulf: see my posts here and here.

3. Taxation of US taxpayers living abroad.

Here's what ties these together. An institution that wishes to adopt, say, the American system of university education will have to be careful to choose employees who understand that system, and to include among that set of employees some who grew up in the American system. This is especially true if your aim is to create an experience that is like attending university in the US. We may not be able to describe the American system exactly or what the boundaries of an education system are, but it is not merely about textbooks, the academic calendar, the style of teaching, or the method of testing.

Parents and students seeking an American-style education know this. Thus, they are willing to pay more in tuition to an institution that employs more Americans. Americans are worth more to the institution; thus we expect to see the institution pay more to Americans.

And when taxes on US taxpayers living abroad increase it will take more to entice Americans to work abroad. The theory predicts American-style universities will do two things as a result of such a tax increase: reduce the proportion of their workforce which is American, and increase the pay of Americans it continues to employ relative to the pay of others with otherwise similar credentials.

If we see an American-style institution that is not paying a premium to Americans what do we conclude? One possibility is that the institution does not want to be know for paying less to non-Americans. The customers, for example, may not understand that their own preference for Americans means the institution values Americans more, and/or they may be appalled by that pay difference. And so, to keep their business, the institution pays non-Americans more than is necessary to attract their services.

Another possibility is that the institution values diversity. This could be because diversity is part of the American system of education. Or it could be because the institution is not merely modeling itself to be American. Either way, each faculty member could be contributing to the diversity of the whole and be paid for it.

A goal of diversity, however, does not imply equal pay to all nationalities. In the US, in some academic disciplines where there are few women, the pay of females has been bid up above that of males -- the wage gap can persist the mix of men and women needed to achieve diversity differs for the mix naturally attracted to the profession at equal wages.

Back to that tax increase that affects only US taxpayers living abroad. Even if diversity is part of the institution's mission you would expect to see the institution increase the pay of the US taxpayers but not to the degree that it maintains the same proportion of Americans in its workforce.

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2 Comments:

Blogger Dubai Entrepreneur said...

So you agree with paying employees according to the value of their marginal product? I read what you are saying, but I can't see your opinion on the subject. I am curious.

11:18 PM  
Blogger uae alias said...

myself i do totally agree!

7:06 PM  

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