"Information asymmetry" cuts both ways

May 5th, 2015

They pretend to pay us, and we pretend to work.

 – A Soviet-era political joke according to Wikipedia, though I've only seen it in an English text describing the C++ object model

Having been born in the USSR, #talkpay – people disclosing their compensation on May 1 - put a series of smiles on my face, expressing emotions that I myself don't quite understand.

The numbers certainly left me pleased with the state of the oppressed proletariat (web designers, computer programmers, etc.) in the rotting capitalist society. I do hope that the $125K/year proletarian will not feel resentment towards the $128K/year guy in the next cubicle. I hope as well that the second guy's manager won't deny him a promotion so as to avoid further offending the first guy.

"Hope", yes; "count on" – no, which is why I won't be tweeting about my compensation. Because my numbers are almost certainly either lower or higher than yours, and why needlessly strain our excellent relationship – am I right, dear reader?

So, yeah, a series of smiles and a range of emotions. But today I want to focus on one particular bit – the one mentioned by Patrick McKenzie:

Compensation negotiations are presently like a stock exchange where only your counterparty can see the ticker and order book. You’d never send an order to that exchange — it would be an invitation to be fleeced. “I happen to have a share of Google and want to sell it. What’s it go for?” “Oh, $200 or so.” “Really? That feels low.” “Alright, $205 then, but don’t be greedy.”

The spot price of Google when I write this is $535. Someone offering $205 for GOOG would shock the conscience. ...folks have received and accepted employment offers much worse than that, relative to reasonably achievable market rates.

All very true, except that with a share of Google, they're all the same and you arguably know what you're buying, and with an employee's services, they aren't and you don't.

There seems to have been a string of Nobel Prize-winning economists who founded "X economics" – such as "behavioral economics" or "information economics." The common thing between "X economists" is, they all (correctly) tell me that I'm irrational and misinformed. But then they conclude that it's them and not me who should manage my money. I believe the latter does not follow from the former. But I'll save that discussion for another day.

In particular, Stiglitz, the information economics guy, opened his Nobel Prize lecture with an explanation of his superiority over other economists. This state of things arose, according to him, due to having grown up in a small town in Indiana, where things didn't work as predicted by standard economic models. Specifically, the proletariat got shafted, prompting Stiglitz to come up with formulas predicting how badly one can be swindled due to his ignorance of the market conditions.

Which is probably very true and relevant, but it cuts both ways. A guy paying me to work on a conveyor belt could measure my productivity perfectly, and probably knew the market for my labor better than I did – clearly he had an advantage. A guy paying me to program, however, might know more about wages than I do. But he certainly doesn't have the foggiest idea what I'm doing in return for his money, even if he's a better programmer than I am.

Basically the "knowledge worker's" contract is something like this:

We'll give you a precisely defined salary and a benefits package. In return, we request that you handle some problems that we're told we're having. We hope that you'll solve them well enough to prevent us from having to know what they were in the first place. Please help us maintain the feeling that we own an asset similar to land or gold or something. Please keep the realization that we're more like the operator of a flying circus than a landowner from disturbing us. And certainly, never, ever ask us what to do with any of the moving pieces of this flying circus, because we seriously have no idea.

Of course, most people have a direct manager overseeing their work in the flying circus who knows more about it than the owner. But, ya know... "...then for the next 45 minutes I just space out", as the quote from Office Space goes. Seriously, it's bloody hard to tell if you're only working at half your ability – the only guy who knows is you. And this information asymmetry seems to me kind of symmetrical with that other asymmetry – employers being better at tracking the labor market, negotiating, etc. So, see the "Soviet" joke at the top of the page...

(Of course it's much better with an actual market for labor – I'm just saying that it's still far from perfect, and it'll get increasingly farther from "perfect" as the knowledge becomes more widely dispersed and you basically just have to trust experts at every step. An economy of dishonest experts – now that's a bloody nightmare. And by the way I actually think we now have enough newfangled technology together with ages-old fallibility to get there. AAA-rated MBSs is just the beginning.)

For a closing remark, I think it's fitting to mention all those bozos saying how "higher compensation does not increase motivation." (A management consultant saying something else might not get his management consulting gig, so I understand where they're coming from.)

To that I say: for me, at least, higher compensation leads to higher awareness of "spacing out" and such – call it "guilt" if you like. Pay me enough and I will think things like, "I'd really like to ignore this here shit, and it's SO ugly, and nobody will ever know. But, sheesh, they paid me all this money, just like they promised. And I sorta promised that I'll take care of the flying circus in return. And so it's seriously not OK to leave this here shit unattended. I better tell someone, and what's more, this here patch is definitely mine to clean, so here goes."

One danger in underpaying someone is it might prevent those thoughts from entering their minds. So, employers – caveat emptor. 'Cause goodness knows that the easiest way to raise one's compensation in the knowledge economy is to simply space out more while getting paid the same.


1. Eric SMay 6, 2015

I couldn't figure out what about #talkpay was rubbing me the wrong way, but I think you've pretty much nailed them all.

Great article! Thank you

2. Ian FerrelMay 6, 2015

The last paragraph is describing an economic concept called "efficiency wages". Paying above market rate because it'll either make employees feel morally obligated to do a good job, or make them do good work to protect their expected future above-market wages.

3. MatMay 6, 2015


My favorite quote from that article was warning about putting your actual salary on a job application because it would limit your offer to within 5% of your current salary.
Why is the 5% limit a problem? If I currently make $80k and I *want* to make $100k, why would I put $80k on the application instead of, say, $99k? The company to which I am apply doesn't know what I currently make; another asymmetry!

4. IlyaMay 6, 2015

Why, it is used still. "Мы делаем вид, что работаем, а они делают вид, что нам платят"

5. SteveMay 6, 2015

#5, I am guessing (without google translate) that that quote is the famous "As long as the bosses pretend to pay us, we will pretend to work."

6. DmitryMay 6, 2015

Some companies will ask you for a copy of your latest paycheck and if you lied on the application, you're screwed...

7. DanielMay 8, 2015

As a note, your income and wealth (as counted by the tax people) is more or less public knowledge in Norway. As of recently you have to log on to see it on the web, and you can see who has looked at yours – but there's still a paper version you can look at anonymously.

It's not perfect – it's after deductions, so it can be hard to estimate what the paycheck sum was. Still, it does make the labor market a tad more transparent.

8. Yossi KreininMay 9, 2015

Makes the market very transparent, I guess. I wonder what this does. I think Norway is generally a bit special in that it has a small population, a comparatively huge amount of natural resources, and a long history of development prior to the discovery of these resources, so it's not like any other country.

9. AvyMay 10, 2015

The quote also appears on the first chapters of Paul Seabright's "The Company of Strangers"[0], where he discusses monetary systems vs. bartering.


10. evpoMay 19, 2015

I thought about it too. When talking about programmers and their compensation, we need to consider http://en.wikipedia.org/wiki/The_Market_for_Lemons . To rephrase its concept for our scenario, we can say this: since the employer doesn't know the quality of the good (which is developer), he/she will be willing to pay for it only the price of a programmer of known average quality. So unfortunately in sometimes it not beneficial to be a good programmer because you will get the average compensation anyway. Some of us are only good programmers because they cannot be bad programmers. It is against their nature. It is as difficult to degrade the quality of your work as it is to improve.

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