THE INDEXING PROBLEM PART TWO

The same indexing problem surfaces in a quite different context, in the proposal currently being debated to award women equal pay for jobs comparable in worth to those performed by men. It may not be immediately obvious that the comparable worth dispute is really an argument about indexing, but a few moments of reflection will make this clear.

            Consider a firm that employs three groups of workers: machine operators, truck drivers, and office clerks. What wages shall it pay? The answer popular with neo-classical economists is, of course, Let the labor market decide. The firm should offer the lowest wage with which it can secure competent help. If the going market price, say for machine operators, is so high that the firm cannot make a profit when paying that wage, then it must either shift to a different production technique or else go out of business. If some extremely simplifying assumptions are made about the production techniques available to the firm, the behavior of workers and consumers, and the motivation of the firm’s managers, then in long-run equilibrium, each worker will earn a wage precisely equal to his or her marginal product, which, under some additional strong assumptions, might plausibly be construed as a fair wage.

            There are essentially three things wrong with this story, which you will all recognize as the standard story told in beginning courses in economic theory. The three things wrong with the story are, First, that it fails to establish its normative claims even in the impossibly restrictive theoretical case of which it is supposed to hold, Second, that it does not hold at all for theoretical cases whose assumptions are somewhat less restrictive, and Third, that it bears no relation at all to what happens in the real world.

            For a demonstration of the first claim, I refer you to the first chapter of David Schweickart’s fine book, CAPITALISM OR WORK CONTROL?   The third claim, that marginal productivity theory totally fails to predict what actually happens, is widely acknowledged.  For an extended discussion, you can consult Lester Thurow’s suggestive work, GENERATING INEQUALITY, or a forthcoming Oxford Press Book, CHOOSING THE RIGHT POND, by a young Cornell economist, Robert Frank.

            I wish to focus my attention on the second problem – the inadequacy of marginal productivity theory for more complicated theoretical cases. What I wish to show you is that under certain theoretical assumptions designed to model more accurately the modern firm, a problem of wages policy arises which, in its broadest outlines, is inescapably normative, and in which the issue of comparable worth plays a central role. There, as we shall see, indexing again proves to be the stumbling block.

            So long as firms are small, single-product producers purchasing all inputs, including semi-finished parts, at competitive market prices, performing a single transformation on the inputs, and selling the output at the same competitive prices, the theory of wage determination is relatively simple. But things go seriously awry as soon as firms grow large enough to engage in multi-stage production processes with joint product outputs.

            Consider a meatpacking firm, for example, that fattens the cattle, slaughters them, butchers the carcasses, packs the cuts of meat, and tans the hides. The managers of the firm must ascertain, by means if their internal accounting system, how much of the total cost of the firm to allocate to each final product, and also what prices to place on intermediate products within the firm for purpose of cost accounting.

            Under these circumstances, it is theoretically impossible to determine the marginal productivity of a worker. Indeed, as firms grow into large bureaucratically organized institutions, it may in practice be impossible to identify any change in final output that can be associated with the presence or absence of a particular employee. Clearly, what is required is a positive wage policy which dictates what level of compensation is to be associated with each position in the firm.

            The first rule that suggests itself – a normative rule, be it noted – is equal pay for equal work, where equal work is interpreted as meaning the occupying of bureaucratically identical positions. All beginning truck drivers, all clerks of grade three, all machine operators working the same machines, will receive equal pay. It is a good deal harder than one might think to come up with a moral rationale for this principle, although considerations of prudence and labor/management peace might suggest it. If the firm were dispensing justice, then one might invoke familiar considerations of procedural fairness, but in a competitive economy, mutual self-interest, and not justice, is supposed to regulate the relations between labor and management.

            But equal pay for identical job position, although a principle capable of revolutionary potential in some circumstances, does not even begin to solve the problem of formulating a wages policy. From a formal point of view, that principle merely groups the workers into equivalence classes, without saying anything about the relative circumstances to be paid to the several classes. Paying all truck drivers the same wage and all file clerks the same wage leaves undetermined which class shall make more, and by how much.

            Some progress can be made by invoking Pareto comparability, assuming that there is agreement on the dimensions along which different positions are to be compared. If machine operating requires the same physical effort as truck driving, more responsibility, at least as much dexterity, and more attentiveness, and if these are the only qualities or characteristics of the work process which ought to count in determining wage levels, then we can agree that machine operators ought to make more than truck drivers.

            But now the old familiar indexing problems reappear! How shall we compare machine operators with office workers, whose job demands greater literacy skills, less physical effort, more independence of judgment, less manual dexterity, and roughly the same degree of attentiveness? Once again, we must define an index which allows us to map heterogeneous characteristics onto a one-dimensional measure.

            This is by no means an issue of purely theoretical significance; you may be interested to learn. In a number of large corporations in this country, top management has found it necessary to develop a detailed policy of compensation and raises which will possess some objective bureaucratic rationale and be perceived as fair by the employees affected. In response to this need, a number of management consultant firms, such as the Hay Company, have developed systems of job evaluation designed to generate a unidimensional index, or numerical measure, of the relative difficulty of the jobs performed by employees, particularly at the lower and middle management levels.

            Consider, as an example, Sears, Roebucks, and Company, the great retail merchandising firm. Sears employs thousands of men and women who occupy such job positions as store manager, large appliances salesman, overhead fan buyer, truck driver, cashier, and vice president in charge of the Middle Western states. These are manifestly incommensurable jobs, requiring skills, talents, efforts and personal characteristics that vary along many dimensions. Sears faces two problems with regard to formulating a compensation policy in the face of this diversity: First, at any given time, what wages or salary shall it pay each position, and how shall it justify that compensation; and Second, how shall it determine what relative raise to give each position annually?

            Along comes the Hay Company with a systematic answer. A middle level executive at Sears – who, as it happens, is currently my brother-in-law – is assigned the task of evaluating each of the hundreds of positions in the Sears system. This executive travels around the country making on-site inspections. He assigns to each job so many points for the amount of physical effort required, so many points for the manual dexterity required, so many points for independence of judgment, imagination, responsibility, direction of subordinates, and so forth, all according to a complex process provided by Hay.  He totals the assignments and arrives thereby at the index of Hay points [as they are called] associated with each position. The top management then decides how many dollars in compensation will be paid per Hay point throughout the corporation, and a simple multiplication gives the salary the Sears will pay to anyone occupying the position. If the position of manager of a “B” store earns 5,134 Hay points, and if Sears decides to pay eleven dollars a point, then any manager of a “B” store will be paid 56,474 dollars.

            As for raises, Sears at the end of each year chooses an amount – let us say 87 cents – which it will pay per Hay point as a raise. Our store manager then receives a raise of 4,466.58.

            How does the Hay Company, or my brother-in-law, decide, when implementing this system, how much weight to assign to industry, initiative, independence, manual dexterity, or the ability to operate a word processor? It should by now be obvious that the answer cannot possibly be in terms of relative profitability to the firm of its employees’ possession of these various characteristics. If anyone could actually ascertain directly such a measure of profitability, there would be no need for the Hay system.

            In fact, as we might expect, the system embodies a number of normative or evaluative presuppositions which are only thinly concealed by a putatively impartial rationale. Head work is routinely assigned more Hay points than hand work. Any position requiring its holder to direct or control the performance of others is valued especially highly. It is not too simple to say that the Hay Company has constructed an index designed to confirm and legitimate the greater worth and hence higher salaries of the positions at the top of the executive ladder, by assigning the greatest weight to whatever talents, skills, traits of character, or modes of activity are in fact performed by those executives.

            But how could it be otherwise? During the Culture Revolution, the Chinese counterparts of the Hay Company dictated an alternative set of evaluations, declaring manual labor to be superior to mental labor, and so forth. The result may have been morally superior – I leave that to your own judgment – but it was not, and could not be, more ‘objective.’

            As should be obvious, the existence in actual operation of practical systems of job evaluation like that of the Hay Company constitutes a continuing source of rueful embarrassment to conservative business men, like my brother-in-law, whose politics incline them to look askance at the demands by organized women workers for equal pay for comparable worth. One cannot operate the Hay system and claim that the concept of comparable worth is economically meaningless without badly fouling one’s own nest! Nevertheless, the real thrust of my remarks is that my brother-in-law is right. Any system for the indexing of incommensurable tasks presupposes a set of normative or evaluative assumptions. Bringing those assumptions to light does not permit us to eliminate them, for without them we have no way of carrying out the indexing process.