The “Pay Equals Importance” fallacy maintains that the wages and salaries people are paid should be commensurate with the importance of the work they do.
People frequently deplore the fact that school teachers make so little money but a famous basketball player like Kobe Bryant makes 30 million dollars a year (including endorsements, etc.). After all, teaching our children is far more important than playing a game. I don’t think there is any question in most people’s minds that teaching children is more important. The trouble comes in assuming that remuneration is based on the importance of the work done.
Think about another realm of economic activity. How important to you is air? I think we would agree that it is absolutely essential. More than a minute or two without air and we die. But how much will your next breath cost? Nothing. That doesn’t mean it isn’t important.
Conversely, how important is a diamond? Sure, we might all like to have a diamond but is it important to have? Will we die without it? No. Yet we spend thousands of dollars on a diamond. Does that mean a diamond is more important than air? Not at all.
The issue we are dealing with here is what economists call marginality. There is no intrinsic price for of a breath of air or for of a diamond. Price is determined by the supply relative to demand. The question is, what will it cost to secure the next unit on top of the previous units already consumed? (Or what is the cost of my purchase at the margin (marginality) of what has already been purchased?) Air is so plentiful that there is no cost attached to my next breath. Yet to secure the next diamond requires a major investment of time, capital, labor, and other resources to extract it from the earth. Alternatively, I can make offers for other diamonds already in circulation. Either way, the cost of the next diamond at the margin is very high.
Returning to our school teacher versus Kobe Bryant example, what is the economic value of the next teacher we might wish to hire versus the economic value of the next Kobe Bryant we might want to hire? The number of people with an aptitude for teaching is many thousands. The number of people who can play basketball at Kobe Bryant’s level might be counted on one hand. Therefore, since teachers are much more plentiful, the next teacher will command a much lower salary than will our scarce star athlete. This says absolutely nothing about the importance of the work they do.
I’m not making any judgments here about placing such a high demand on basketball talent anymore than I am about valuing highly compressed lumps of carbon (diamonds), the ability to place paint exquisitely on a canvass, or being able to play a character in a movie. The central issue is that societal importance of task is not the determining factor of economic value. Supply relative to demand is.