In observing the labour market and reviewing company revenue reports, I have realized there is a significant gap between the cost of labour in production and the price of products on the market. This seems normal, and is widely accepted, but why does this disparity exist? I believe there is a definitive and widespread discussion about this topic, but I also have some thoughts on it that I wish to share.
Who Defines the Value of a Product?
“Value” is a vague word here. It can refer to the profit generated from a purchased product, or the money paid to acquire it. For this discussion, I will define value simply as the final market price labeled on the product.
Numerous theories exist on how to determine a product’s price: cost-based pricing, value-based pricing, competition-based pricing, and so on. In every case, the final price should not be lower than the total cost. Regardless of the pricing method, the price is ultimately only valid when the customer is willing to pay for it. Considering consumers as a whole, the market price is largely defined by demand and competition.
Crucially, we have not mentioned labour here. While labour cost is certainly a component of the total cost, it is often not the only, or even the most significant, part. In reality, marketing teams set the price, and consumer choice—the willingness to pay—heavily influences that price point. Labour cost is not the key factor in price consideration. Because labour cost does not directly dictate the final price, there is a fundamental mismatch between the money spent on labour and the profits generated from the product.
What Decides the Labour Cost Then?
From a buyer’s perspective, labour cost is the price of a human resource. It is itself a product, sold by employees to employers. We know that the human population far exceeds the human resources required by the market. Consider the price you pay for a loaf of bread—perhaps just a few dollars. You are unwilling to pay more because you know many other loaves are available; you can always find a substitute. The same logic applies to human resources. There are many individuals willing to work, so why should an employer pay more than the minimum necessary to fill a role?
The customer—the employer—holds the power to decide the price of the “product,” which is the labour. In their perception, labour cost should be as low as possible to maximize profit. Consequently, the labour cost is low in general, and many people feel underpaid. If the human-made products themselves could speak, they might well echo the sentiment: “We deserve a higher price!”
So, how can we avoid being the easily substituted “loaf on the shelf”? I believe the key lies in the concepts of risk and its related concept, complexity. A highly complex system invariably has more risk involved. We can observe a clear correlation between personal income and the complexity and risk associated with the job being performed.
In my opinion, jobs or human resources can be classified into three categories:
1. Routine Jobs
These jobs are clearly defined, have set procedures, are well-resourced, and require a limited range of tasks.
- Examples: Assembly line workers, staff performing standardized paperwork.
- Value: Workers only need to repeat a defined procedure. Anyone can easily manage this job in a short period. The value of this job is primarily the price of a human being performing manual or simple administrative labour.
2. Problem-Solving Jobs
This work usually has a clear goal, but the method to achieve it is not clearly defined, and the results are often uncertain.
- Examples: A technician fixing a unique phone defect, a doctor diagnosing a complex patient case.
- Value: The complexity is higher. The labour cost is determined by the financial loss or negative outcome that the employer/society would incur if the problem were not solved.
3. Explorer Jobs
These kinds of jobs typically do not have a clear goal, and the corresponding process is not defined at all, leading to unknown consequences.
- Examples: Research scientists pursuing novel hypotheses, entrepreneurs launching a new business category.
- Value: The complexity and risks are very high. The labour cost is tied to the value of the potential outcome it may bring. If it succeeds, the value created can be huge, justifying a high potential compensation.
In reality, most jobs are a mix of these three categories, and the labour cost is determined by the proportion of each. The more complex and risky the job, the higher the labour cost will be.
Therefore, to increase our individual labour value, we should strive to take on more complex and risky tasks, moving away from routine jobs as much as possible. However, the perceived risk and complexity are relative. We can effectively lower the complexity and risk of a job for ourselves by acquiring specialized knowledge and experience. By doing so, we increase our indispensable value in the labour market and secure better compensation for our work.
