Does the Employee Status Worsens Social-Economic Inequality?

Tl;dr: the fact that the employee does not get paid for his productivity but for his time lowers overall productivity and widens social-economic inequality. Employees receive financial compensation equal to approximately 20% of the value they produce, the remaining 80% ending up in the pocket of the company, and its stockholders.

If you have ever googled “money”, “how to get rich”, or “entrepreneurship”, chances are that you subsequently became bombarded with Youtube ads promising you to explain how to make money in “passive income”.

What is passive income? Passive income is an income credited to your account without you having to do anything for it.

Having tenants paying you rent is effectively receiving passive income. Having dividend-distributing stocks is also passive income.

If you lend money to someone that will pay you an interest over 10 years, you’ll get passive income for 10 years.

If you build a small business and hire a manager to take care of it, whatever money you’ll be making will be passive income.

Let me repeat that again.

Employees are sources of passive income for the owners of the company they work for. 

In this article, I argue that the status of employees, as it currently exists in our society, widens social-economic inequality.

Here’s how.

How the Employee Status Worsens Social Economic Inequalities 

In the article about the Warren Buffett paradox, we have outlined how Warren Buffett, through buying companies, became abnormally wealthy.

To illustrate Warren’s strategy, we have given the example of 100 farms, each owned by one farmer.

When all farmers own their means of production, farmer income strictly depends on their productivity.

He who produces a lot makes a lot.

He who produces little makes little.

This is the principle that applies to “independent workers” or a “business owner”. Doesn’t get more meritocratic than that.

The farmers’ society, in our case, is a fair society. All farmers are making more or less similar income because they are more or less equally productive. Period.

Then came one farmer who decided to buy the farm of his neighbor, which increased his income. From enjoying the production of one farm, he came to enjoy the production of two farms (minus paying a salary to the employee).

Then he bought another one, then another one. And then he bought all of the remaining farms. By the time he had finished his shopping spree, this tycoon’s income was about 34 times bigger than that of the new “salary” of his workers.

How?

Simple. Like almost all people that became rich, he had other people working for him. Understand: other people making him richer.

The Business Owner vs His Employee

The way the economy works is the following: each economic agent produces something, that he sells against money which allows him to buy something else that someone else sells.

This is how the economy works. This is in fact how nature works. Plants produce oxygen that animals breathe and animals defecate on the plants which it uses to feed itself in return.

Animals produce manure for plants and get oxygen in exchange. In economics terms, this is called capitalism. If you want something, you need to produce something else in exchange, because it is fair.

Nothing is free. Nothing can be free.

Period.

This is not the case for employees.

When an employee makes a salary, he does not receive it in terms of his productivity within the company. While production is implicit, the real good that the employee is selling, and the one he exchanges against a salary, is his time.

Employees don’t get paid according to productivity metrics (even though they get judged by it); they get paid according to the number of hours they stay at the office (hence the question “do we get paid for working overtime?”).

This is exactly what explains the difference between owners that become rich, and between employees that remain poor: owners’ income depends on productivity (understand: scale). Employees’ income depends on time. And time, sadly, cannot be scaled.

Marx

As much as I hate to admit it, Marx was not entirely wrong. In his communist manifesto, he criticized the fact that factory workers did not own their means of production.

The driver did not own his truck, the operator did not own his machine. As such, the driver wasn’t get paid more to deliver more goods faster, and the operator didn’t earn a bigger income by producing and operating his machine better.

Marx interpreted that as an injustice. He thought workers to be powerless and at the mercy of their employer because while the employers owned the means of production, workers owned nothing, which led to the “alienation” of workers, according to him.

Unfortunately, he made a mistake. Indeed, if you’re making money, it means you have something to give in exchange for the money you’re receiving. That “thing”, as we call it, is time.

Employees were therefore not “powerless” over their employers. They weren’t selling them “work”, or “production”. They were selling a portion of their time during which they were at the disposal of their employers.

Employee vs Contractor

When a company needs to hire someone from the outside, it has two choices. Hiring an employee and hiring a contractor. The difference between a contractor and an employee is the following: the contractor is hired to solve a problem and get paid to do so.

The employee is hired to bring in more money than is spent on his salary.

Let’s take an example.

Company C has problems with its accounting. They decide to hire a big accounting firm that will have a look at the accounts.

The big accounting firm estimates the job to cost 1000€. Company C agrees and the big accounting firm gets to work. They find the problem, fix it, and pocket 1000€.

However, through working on the original problem, they find another problem and offer company C to fix that problem for an additional 1000€. Company C agrees, the big accounting firm fixes the second problem and leave happy with 2000€.

Company C is happy too, it doesn’t have any more problems in its accounting. The end.

Company C had a problem and paid someone to fix it. Done. Let’s now have a look at what would have happened if an employee had been hired instead.

Company C needs to hire an accountant because the accounting team needs help. They publish a job offer, interview a million candidates, and choose the one that went to Harvard because of that.

The employee signs the contract in which he agrees to receive a salary for the number of hours worked, even though he is hired to fix problems.

The new employee gets to work and finishes his first task. Since he likes what he’s doing, he also fixes a second, third, and fourth problem in the accounts, staying up late at work to improve the company’s productivity.

At the end of two months, the employee fixed more than 20 000€ of problems that the big consulting firm would have been paid to fix, had they been hired instead. The salary of our employee? 2000€ monthly.

No more, no less, despite the extra effort invested.

In other terms, the employee produced for 20 000€ of value, and only saw 10% of it, his salary (without taking into account taxes, etc).

Inequality

The difference between an employee and a contractor is the following: a contractor gets paid to fix a problem. An employee gets paid to bring in more money than is spent on his salary.

That’s it.

This is why contractors work fast and are reliable, and why “an employee is a problem whose size is inversely proportional to his salary”. One gets paid for his work, the other gets paid for his time.

As such, the employees that don’t do anything make more than they bring in, and usually end up getting fired. But most of the employees bring in more money than they get paid and end up staying in the company.

The status of employees is therefore not fair because the reward does not depend directly on the productivity metrics. Two employees working the same amount of time will achieve different levels of productivity yet receive the same salary.

So who’s benefiting from the employee’s productivity?

Answer: the owner.

While renting out an apartment is passive income, an employee is also some sort of passive income. Companies hire employees that make money for them.

An employee de facto does not get paid the share of the money he brings in, because if he did…there would be no company.

The Bottom Line

A fair society is a society where people’s income is directly proportional to the value they deliver. Because employees are not paid for the work that they do but for the time they spend doing it, they do not get their fair share of salary.

It was estimated that employees get paid approximately 20% of the money they bring into their company. If your salary is 2000€, you should be proud to know that you actually produce a value equal to 10 000€.

While communism identifies similar problems of unfair pay, they proposed various solutions such as replacing capitalists’ ownership of capital with workers’ ownership of capital, forcing those that are productive to pay for those that are not.

None of this has worked, none of this can work, none of this will work.

Communism does not solve the causes of the problem, but merely some consequences of it.

The real problem comes from the status of employees getting paid for their time, and not for their work. As such, a way to make society both fairer and more productive would be to altogether suppress the status of employees.

Everyone would become their own company and would be paid for the work produced, not the time spent at the office. Everyone would become a contractor getting paid to solve problems and produce solutions.

Society would, as a result, be much more egalitarian, much more productive, and much richer as well. The reason why it is possible to have people like Warren Buffett, Bill Gates, and Jeff Bezos being worth hundreds of billions is because they have hundreds of thousands of people working full-time jobs for them, making them richer. 

It is by preventing someone to become the employee of someone else, that we will be able to lessen to a great extent, social-economic inequalities.

To conclude, here’s a joke.

An employee is waiting for his boss in the parking lot. The boss arrives in a brand new Ferrari.

“Wow, says the employee, not bad!

– If you work hard, arrive earlier than planned, stay late, and overall do better than what I expect from you…I’ll be able to get a second one like that next year.”

Photo credits: Photo by Hunters Race on Unsplash