How wages are set
Why You're Not Paid What You're Worth
The idea that your wage reflects your productivity is one of the most elegant theories in economics — and one of the least true in practice.
The Idea
Standard economic thinking says wages settle where supply meets demand: if you're productive, competition between employers will bid your pay up to match your contribution. It's a tidy model. The problem is that labour markets don't actually work like markets for, say, copper or wheat. Workers can't instantly relocate, retrain, or see what rivals are paying. Employers, meanwhile, often face very little competition for the workers they need — a phenomenon economists call monopsony, where a buyer has disproportionate power over sellers. When a town has one major hospital, one large factory, or one dominant tech employer, workers aren't choosing between dozens of offers. They're negotiating from a much weaker position than the textbook implies. But power isn't the only distortion. Wages are also shaped by convention, inertia, and something closer to social norms than market signals. Research consistently shows that wages in the same role vary enormously between firms, industries, and regions — far more than differences in worker skill or productivity can explain. A lot of what determines your pay is simply where you work, not how well you work. The firm you happen to be employed by captures a significant share of the value you create, and you capture the rest. How that split is negotiated — formally through contracts, informally through norms — is at least as important as anything about your individual output.
In the World
In the early 2010s, it emerged that several of Silicon Valley's largest companies — Apple, Google, Intel, Adobe, and others — had quietly agreed not to cold-call each other's engineers. No poaching. On the surface it looked like professional courtesy. In practice, it was a wage-suppression arrangement. With fewer competing offers in their inboxes, engineers had less leverage to negotiate raises or jump ship for better pay. The firms involved knew exactly what they were doing: internal emails showed executives explicitly linking the no-poach agreements to keeping salaries flat. The lawsuit that followed revealed something striking. These were some of the most sought-after workers in the world — highly skilled, globally mobile, in an industry drowning in venture capital — and even they were subject to coordinated employer power. If monopsony could operate in that environment, it can operate almost anywhere. The settlement ran to hundreds of millions, spread across tens of thousands of affected workers who had, without knowing it, been paid less than a genuinely competitive market would have delivered. The lesson wasn't just about corporate misbehaviour. It was a demonstration that the gap between 'what you're worth' and 'what you're paid' isn't a natural feature of markets — it's a negotiated outcome, and the negotiation is rarely between equals.
Why It Matters
Understanding this reframes how you think about your own pay. If wages were purely a reflection of productivity, the logical response to feeling underpaid would be to work harder or upskill. And upskilling genuinely matters — but it's not the whole picture. The firm you work for, the industry you're in, the density of competing employers in your area, the strength of any collective bargaining in your sector — these structural factors may matter more than your individual performance in setting where your pay ends up. This is practically useful. It means that switching employers often does more for your income than waiting to be rewarded for loyalty. It means that geographic moves, industry shifts, and even changes in job title can unlock pay jumps that years of incremental performance reviews won't. And it means that when someone tells you wages are simply 'what the market pays,' you're entitled to ask: which market, with how many buyers, under what conditions? The answer shapes your negotiating position more than almost anything else.
A Question to Ponder
If your employer faced genuine competition for you tomorrow — three strong offers landing at once — how different do you think your pay would look?
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