Thursday, June 23, 2005

The Law of Supply and Demand in the Labor Market

Faleomavaega attacked Del Monte, which owns StarKist Samoa (SKS), for opposing any increase in the minimum wage while paying its CEO “1.7 million dollars in salary, bonuses, and other compensation in FY 2004.” He seems to have a point. Why not raise the pay of its workers when the company can pay its top executives so much.

But hundreds of people can process fish. Hundreds of people in hundreds of other countries can process fish as well. The vast number of people willing to do the work outnumbers the number of positions needed to do the job. The high supply of people capable of performing the job lowers the price the company has to pay in wages.

This only makes sense. With more responsibility, more knowledge, more qualifications and more experience comes more pay. People who have more qualifications are in lower supply than those without. So obviously, if the company wants to keep its more qualified personnel, it will have to pay them more than the rest of the workforce. So is the case with top executives, whose backgrounds most likely include years of experience, qualifications and knowledge.

Wages, whether they are at the top end of the scale or the bottom, are set by what the employer is willing to pay and what the employee is willing to accept. If top executives don’t like the compensation, they can go somewhere else. If fish cleaners don’t like the compensation, they can go somewhere else as well. If employers can’t find anyone to do the work for the compensation they offer, obviously, they would have to raise the pay until they do.

Stockholders and a board of directors want to reward top executives who continue to do a good job, because it isn’t an easy thing to do. If it were, then the supply of quality executives would be higher, and as a result, their pay would be lower. However, that is simply not the case.

Can there be a cap on compensation for top executives? Ben & Jerry, an ice cream company, tried to do such a thing. They limited the top executive’s salary to seven times that of the lowest paid employee, an $8/hr scooper. Quality executives would not work for the relatively low compensation so the company got one unqualified CEO after another. Their profits plummeted and so did their market share. The company went from one CEO to the next until they finally smelt the coffee and removed the salary caps.

Faleomavaega wants minimum wage increases at the risk of higher unemployment in both the private sector and government. He should come forward and take responsibility for his position. Instead, he would rather try to divert the public’s attention to top executives, whose salaries are determined by economic law as everybody else.

Regardless of how many employees it has or how little they pay in wages, having the tuna industry in American Samoa is better than not having it at all. Whether it decides to stay or not is well within its right to choose.

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