Why Some Jobs Pay More Than Others

Why It Matters

‘Why does a doctor make more than a teacher? Why does a programmer make more than a farmer? Why does a truck driver in one state make twice as much as one in another?’ Most people answer these questions with moral intuitions about who ‘deserves’ more. Those answers feel good but explain nothing. The real answer is economic, and it has nothing to do with who is a better person.

Understanding wages clearly at your age prevents two mistakes. One: looking down on low-paid work and the people who do it, because you assume the low pay reflects low worth. Two: resenting high-paid work and the people who do it, because you assume the high pay reflects greed or unfairness. Both mistakes come from confusing wages with worth. Wages measure supply and demand. Worth is a completely different thing.

This lesson is also practical. When you are deciding what kind of work to pursue, understanding the forces that set wages helps you see which skills will be in demand, which are likely to be replaced, and which might pay well despite being ‘easy.’ People who pick careers based on what they love without also asking about these forces sometimes end up surprised — for better or worse.

Most importantly, this lesson equips you to have honest conversations about pay. Kids who grow up thinking ‘my mom should earn more than a celebrity because her work is more important’ are not wrong about the worth part — they are wrong about where pay comes from. Once they know where pay comes from, they can still be upset about the worth part, but they can be upset with clear eyes instead of muddled ones.

A Story

Four Different Paychecks

Twelve-year-old Alex had an afternoon to spend with his grandmother, a retired labor economist named Ruth. He had been asking why his favorite teacher earned much less than a friend’s father, who was a software engineer. Ruth decided to walk him through it by example.

“Okay,” she said, “four different jobs. Let me tell you what each person earns and why.”

“First: a dishwasher at a restaurant, about $14 an hour. Why so low? Because almost anyone can do the work — there is a very large pool of people who can physically wash dishes — and the work only creates so much value per hour for the restaurant. If one dishwasher quit, many others are available. Supply of workers is large, so the price for each one stays low. This is not about whether the dishwasher is a good person. It is about how many other people could take the job tomorrow.”

“Second: a public school teacher, about $55,000 a year. Teachers need real skills — years of education, classroom management, subject knowledge — and their work creates enormous value for society. But their pay is low compared to other skilled jobs. Why? A few reasons. Schools are funded by government budgets that do not expand easily. The workforce is large — many people are qualified to teach. And the value teachers create is mostly captured by students and society, not by the school that hires them, which limits what the school can pay. Teachers are badly paid relative to their skill because of how the market that hires them is structured, not because teaching is unimportant.”

“Third: a software engineer at a tech company, about $180,000 a year. Why so much? Because the supply of people who can really write good code for complicated systems is small. The demand is huge. And a single engineer’s work can scale — the same code can serve millions of users, creating enormous value per hour of engineer time. Scarcity, demand, and scaling together produce high pay. The engineer is not a better person than the teacher. They are in a market where the forces work differently.”

“Fourth: a commercial fisherman on a dangerous boat, about $80,000 a year, but seasonal and with real physical risk. Why the number? Because not many people are willing to accept the risk and the hardship, so the supply of willing workers is smaller. The work creates real value per hour. And the risk itself has to be compensated — if the job paid like an office job, almost nobody would take it. High pay here is not mostly about skill. It is about paying for the part of the job that most people would refuse.”

Alex took it in. “So the forces are... how many people can do it, how badly it is needed, how much value is created, and how much risk or hardship?”

“That is the short version. Every wage is some mix of those four forces. None of them measure the worth of the person. They just describe the market. The teacher is not worth less than the engineer as a human being — she is in a market that produces lower pay for the work, even though the work matters hugely. The dishwasher is not worth less than anyone — he is in a market where the supply of workers is very large.”

“Is that fair?” Alex asked.

Ruth thought about it. “Fairness is a different question. The market is not trying to be fair. It is trying to clear — to match workers and jobs at a price that works for both. Whether the market price is morally fair is a question you can ask afterward, and reasonable people disagree about it. But you cannot even start that conversation until you know why the market produces the prices it produces. That is the whole reason I’m telling you this now.”

Vocabulary

Supply of labor

How many people can and will do a given kind of work. More supply tends to pull wages down; less supply tends to push them up.

Demand for labor

How much employers need a given kind of work done. More demand tends to push wages up; less demand tends to pull them down.

Value per hour

The amount of economic value a worker’s labor creates for their employer per hour. Jobs that create a lot of value per hour can sustain higher pay; jobs that create less cannot.

Compensating differential

Extra pay for work that is dangerous, unpleasant, or requires a lot of sacrifice. Commercial fishing and underwater welding pay more than their skill would suggest because the risk itself has to be compensated.

Worth versus wage

Two completely different concepts. Worth is about moral value as a person or as a contribution. Wage is a market price for labor. Confusing them is one of the most common mistakes people make about money.

Guided Teaching

Let’s lay out the four forces that set wages.

Force one: supply. How many people can do the work? The more people who can, the lower the wage tends to be. Jobs that require only basic skills have huge supply and usually pay low. Jobs that require rare skills — surgery, specialized engineering, elite athletic performance — have small supply and pay much more. The supply of workers is probably the single biggest force in wage setting.

Ask: can you think of a job that pays well mostly because not many people can do it?

Force two: demand. How badly do employers need this work done, and how willing are they to pay for it? Demand varies by industry, region, and period. A software engineer in a tech boom is in extreme demand; a buggy-whip maker in 1950 was in no demand at all. The same skill can be highly paid in one era and poorly paid in another, purely because demand has shifted.

Force three: value per hour. How much economic value does a single hour of this work actually create for the employer? A programmer who writes code that serves a million customers creates enormous value per hour. A house cleaner who scrubs a single bathroom creates real value, but only within the scope of that one bathroom. The scalability of the value matters. Work that scales — one effort serving many people — tends to pay more than work that does not scale.

Force four: compensating differentials. Dangerous, dirty, dull, or distant work pays extra, because otherwise too few people would take it. An underwater welder earns far more than a welder on land, not because the welding is different, but because the job requires risking your life. A night-shift nurse earns more than a day-shift nurse for the same reason. This is the market’s way of paying for hardship.

Put them together and any wage can be broken into a combination of these four. A surgeon: small supply (long training), high demand (people need surgery), enormous value per hour (saving a life is not a small output), and significant compensating differential (the stress and responsibility are brutal). All four factors point up, which is why surgeons are highly paid.

A preschool teacher: moderate supply (many people could do the job but few have the specific combination of patience and training), high demand (every community needs them), moderate value per hour as captured by the school (the value to society is enormous but not fully captured by the employer), and limited compensating differential. The factors do not all point up, and the market produces a pay level that does not match how valuable the work really is to the world.

This gap — between wage and social worth — is one of the hardest things about labor economics. It is real and it is frustrating, especially for jobs that are clearly important. There is no clean fix for it. Societies try to adjust it through things like public investment, unions, and legal minimum wages. None of these are perfect. The key thing is to see the gap clearly instead of pretending it does not exist — and to never confuse ‘underpaid’ with ‘not important.’

One last thing. You can use these forces to think about your own future career. Jobs that combine several up-pointing factors — rare skill, rising demand, scalable output — will tend to pay well. Jobs that depend heavily on only one factor (especially demand) are more vulnerable to sudden change. This is not the only thing that matters about a career, and it should not be — love of the work, purpose, and fit all matter — but knowing the economic forces is useful when making real decisions.

For Discussion

1. 1.What are the four forces that set wages?
2. 2.In the story, why does the software engineer earn so much more than the teacher?
3. 3.Why does the commercial fisherman earn more than many office workers, despite not requiring a college degree?
4. 4.What is a ‘compensating differential,’ and why does it exist?
5. 5.What is the difference between ‘worth’ and ‘wage’? Why is it important not to confuse them?
6. 6.Can a job be underpaid and still important? Can a job be highly paid and still unimportant?
7. 7.Which of the four forces do you think is most important when choosing a future career?

Practice

The Wage Detective

1. 1.Pick five jobs you are curious about. For each one, look up (or ask a parent to help look up) the typical annual pay.
2. 2.For each job, try to explain the pay level using the four forces: supply of workers, demand, value per hour, compensating differentials.
3. 3.Do not try to say whether the pay is ‘fair.’ Just explain why the market produces the pay it produces.
4. 4.Pick the job whose pay surprised you most. Write one paragraph explaining what factor you underestimated.
5. 5.Share your analysis with a parent. Notice which jobs are paid more than their importance suggests and which are paid less.

Memory Questions

1. 1.What are the four forces that shape wages?
2. 2.What is a ‘compensating differential’?
3. 3.Why is ‘worth’ different from ‘wage’?
4. 4.Why can a highly important job still be underpaid?
5. 5.What does it mean for work to ‘scale,’ and why does it affect pay?
6. 6.Why is it a mistake to judge a person’s worth by their wage?