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Comment by graeme | Hacker News Reader

I've been thinking about this. Let's say a company has 1000 employees at $50,000 per year.

They were able to find enough workers at that rate. Now let's say they need 100 extra workers.

They'd expect their labour costs to go up 10%. But, it turns out there isn't a supply of 100 workers at $50,000. To pull in extra workers, they'd need to offer $60,000.

So far, so good. Extra labour costs are only $6,000,000, and only $1,000,000 are from higher wages. Prior total was $50,000,000.

But, you can't just pay the old workers $50,000. Humans don't work like that. You can't say "you were happy before, but these new people needed more money, so they get more"

Instead, you pay everyone $60,000. So your new labour costs are $66,000,000.

That's a 32% increase in wage costs for a 10% increase in labour.

Is there a name for this? And does this explain why companies avoid raising wages when they want a higher number of workers?

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Yes, but I can't find the name for it right now. It is also the reason companies have people work overtime even though it costs +50% more because it is still cheaper than hiring more workers.

Most introductory economics textbooks go over it.

If you are still reading this thread and have not read any economic textbooks, I HIGHLY recommend you start reading some economic textbooks. It is my favorite subject, I read dozens of textbooks on my own after I read my first introductory one, and I am a software engineer who majored in computer science.

I think it is highly useful in learning the "science" behind how businesses operate and I definitely think it is useful to learn regardless of what industry you work in since all businesses are subject to the "science" of business in capitalism.

I quote "science" because you cannot really test economic theory but it is as close as you can get and it brings a lot of insights into businesses when you learn it.

I actually majored in econ :) It was extremely useful in fact. But I don't recall hearing this wage theory, possibly because it deals with a semi-irrational aspect of wages. Econ historically wasn't good at irrational things. (Using irrational in the strictly literal, econ sense)

We did talk about wage stickiness, and this is related.

I'm not sure of an exact name for that but what you're describing can be considered the theory of marginal productivity[1].

Your argument that the 10% cost in labor (to hire those 100 extra workers) is where the additional cost ends is a common logical fallacy -- those 100 extra workers will not be operating at 100% efficiency from the get-go. They will need to be trained and there will be a ramp-up period, and up until then they will likely have a negative return on investment.

What this means is that the value derived from these new employees will be net-negative for a period of time. One could say that ~10-30% of that $6M in new labor costs for the next 12 months will not be recovered.

Your theoretical scenario could result in:

* current employees departing (taking institutional knowledge with them, decreasing the efficiency of your organization)

* current employees using their hours at work helping ramp up their new co-workers (decreasing the efficiency of your organization)

* new employees taking on tasks they're not yet trained for (decreasing the efficiency of your organization)

Furthermore, some new employees will not stick around for multiple reasons (eg: family events like a spouse moving to another city, being unqualified but passing the interview process, etc), and therefore the significant investment in them will be gone for good.

Now, that said, is it better to give everybody a 10%? Of course not, but only because everybody is not equal. Raises should be handed out based on competence-based metrics (be it qualitative reports from co-workers and managers or self-reported quantitative data pertaining to their individual impact). Real bottom-line pushers would even qualify for 20% raises.

[1] https://en.wikipedia.org/wiki/Marginal_revenue_productivity_...

I was simplyfying to make the example clearer. The overall point I was trying to make is that adding marginal workers can raise average wages if employers pay the new workers more. (And thus, they don't, and complain of a supply shortage)

Is there a word for that?

Pointing out the "fallacy" in an incidental point I made isn't really constructive. Because I think you're agreeing that if new hires get more pay then so should existing workers.

You took as arguing that that shouldn't happen, but I wasn't arguing that.

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