losing wages for commutes and other monetary issues March 3 2011

today i will be writing about economics, kind of.

consider a regular company. worker $A$ is the employer. $A$ is accountable to stockholders, which pressure him to increase profits of the company. let’s say it is a very simple company, whose profits $P$ is just $P=I-E-R$ , where $I$ is income, $E$ is the expenses except $R$ , the office rent.

so $A$ proceeds to make an honest, informed decision based on this new fact: there is a new office whose $R_n < R$ , i.e., has a smaller rent. since there are no plans on changing expenses or profits, we can solve $d=P - P_n$ and if $d < 0$ , we should choose $P_n$ . so $d = I - E - R - I + E + R_n \leadsto d=R_n - R \leadsto d<0$ . this comes from $R_n < R$ . we should choose $P_n$ .

so the company sees an increase in profits of $P_r = P - P_n$ . good management and business as usual.

but in the math above there was no account for worker loss, i.e., how much of the workers’ wage is used to pay the commute. let’s now imagine the new location has longer commutes to get to work, making all workers spend more on the trip. if each employer spends $C_i$ extra on the new commute, to a total of $C$ , even though the company had positive $P_r$ , for the workers, they have just lost a part of their salary. in fact, considering wages remained constant, each worker just had a “demotion” of $\frac{C_i} {W_i} \%$ where $W_i$ is the worker’s wage.

here we see a perfectly lucid, valid management decision flawed in principle, by the very definition of company profits. this would fall in the emergent theory of how a company can be evil, without anyone in the network wanting it to be so. where is the flaw? let’s look at how we defined the company profit. we assumed $E$ , expenses, was constant, because they are the company expenses. but since a worker’s commute time is not considered a company expense (depends on the company, obviously), a more realistic expense definition would be $E_r = E + C$ . but if we do it this way, we now know that we will only have profits if $R_n - C_n > R - C$ , i.e., only if what the company saves in rent makes up for what the workers pay extra for the commute. this is similar to giving everyone a raise equal to the difference in commute cost. good for the workers, worse for profits of the company.

but it’s the very definition of profit that biases decisions towards less privileges for the workers that are highly affected by this. let’s see a concrete example.

worker makes 500€, boss makes 5000€
worker commute costs 50€, boss commute costs 50€
company changes location, increases all commute costs by 100€
worker now makes a net 500 – 50 – 100 = 350€, boss now makes 5000 – 50 – 100 = 4850€

this is equivalent to causing a “demotion” of 450€ to 350€ of the worker (-22%) and a “demotion” of 4950€ to 4850€ of the boss (2%). for the boss it might seem like “peanuts” and a “worthy sacrifice”. for the worker, it might be the difference between affording rent or not.

simultaneously, in this simple everyday example that i’ve lived through already, we can see two properties of a company-as-network that, for each individual, are not usually obvious.

on one hand, we see how management decisions can be done “correctly” and cause harm beyond the realm of decision, and provide whoever is deciding with a fake “solid” answer to a question (or a way in which economics successfully induces self delusion). since there were hidden variables in the calculation, it was flawed from the start. and the fact that “equations” are used to obtain answers (i put double quotes because they are completely arbitrary), just reinforces the fact that we’re dealing with a lot of nonsense (just like the math astrologers do, oblivious to the fact that astrology is bullshit). the best decision might be flawed by its own what is best definition. nothing that the humanities didn’t know, but something that economists avoid, when their field is, fundamentally, a field of humanities.

on another hand, how personal sensitivity to income is biased tremendously by one’s on income, and with it, empathy and understanding towards other, lower income, workers. 20% is a lot, and some workers might even consider changing jobs because of the commute. this might sound silly, but even if they accepted a job for 10% less, they would be making net 10% more than in their current situation. a boss might deem acceptable a change that might be tremendous for a worker, and nowhere in this network any one of the nodes needs to be aware of this. i.e., the apparent lack of empathy towards issues doesn’t need to be explained with greed. it can simply be explained by incompetence, just like the above example.

but if a network has too many incompetent nodes, it might obtain characteristics that its nodes wouldn’t anticipate (note that this is almost a tautology).

in my case, i sold my car and bike/public transit to work, which gave me an equivalent to a pay rise, since my employer would never do such a thing. i have no doubt my company is making more profit in this new location, but i know some workers now make less because of that. and i also bet nobody in the company consciously wanted this. it’s a conspiracy without any conspirators. also similar to one of my favorite quotes, Hanlon’s razor, never attribute to malice that which is adequately explained by stupidity.