Exorbitant Wages Revisited

Last Sunday I was listening to Fereed Zakharia’s GPS on CNN where he was discussing the rapid and dramatic rise in salaries with Malcolm Gladwell, writer of books like Blink, Turning point etc. Gladwell’s basic thesis in much of his writing is that, whereas common wisdom attributes great success and failure to mainly individual attributes, much of it is really influenced by circumstance along with familial and cultural factors. His classic example is one of the professional Canadian hockey players whose birthdays are almost exclusively in January, February and March. This is because, in Canada, at a very early age kids are grouped according to age with the cut-off being the end of the calendar year. So the kids born in January are almost a year older than those born in December and at the very early age there is a tremendous difference in their development. The more capable kids (read the older kids) are moved into an elite league the following season and get more than 5 times as much ice-time and better coaching than the kids left behind. Not having the time to develop their skills, the kids left behind never catch up. (But I digress)

In the discussion, Gladwell pointed out that there was a surge in the salaries of athletes, entertainers, lawyers and CEOs starting in the 70s. He correlates this with availability of capital. Prior to that time capital was scarce, but in the 70s there started to develop an overabundance. With a shortage of capital, when it came to bargaining for wages with talent, capital had the upper hand. The balance of power shifted in the 70s and instead of talent competing for capital, now capital was competing for talent and gave in to the demands for higher wages. In the case of CEO’s he also pointed out that added to this, institutional investors “rolled over” further tipping the playing field in favor of the CEOs.

I think the above is an interesting insight into why large salaries started to be paid but it does not address the issue raised in the previous posting on the topic. Why are these jobs deemed to be worth the exorbitant pay? How much one is paid depends on two things, the value and availability of the talent and the competition between the buyers. Gladwell’s argument addresses the specifics of why the change now. In “the Wealth of Nations”, Adam Smith addresses the underlying issues relating to both.