Once in a while, you may hear economists on television droning on about industries that “add value” to the economy. You can be forgiven for changing the channel to something more interesting, like the “Paint Drying Channel,” but the concept of economic value is more relevant to your life situation than you might imagine. I would even venture to say that economic value and “value adding” industries are pretty much the source of your entire life situation.
What does it mean when an industry “adds value”? In some senses, “adding value” is a fancy term for making a profit. An industry that adds value to the economy is one that adds high profits to the economy, but there’s more to it than that. Consider the potential value in an ounce of steel. You could turn that once of steel into a box of paper clips worth a buck. Or, you could turn that steel into a surgical instrument worth $2,500. It’s the same steel, but as you can see, one output is a lot more valuable than the other.
How much more do employees of the surgical instrument company make than the ones who churn out paper clips? I would imagine they do a lot better. And, the people who know how to extract $2,499 worth of extra value from a raw material probably have better job longevity. If they know what they are doing, the employer doesn’t want them to leave. So, which job would you rather have? Or, consider software. You’re taking nothing – air, basically – and turning it into an endlessly scalable product. There’s a lot of value in software. Look at Google, Microsoft, and Facebook. Those are high value-adding companies that pay their workers well.
The other question, of course, is how much of that created value does the worker get to keep, and how much stays with the employer? This can be a touchy topic, at the root of most labor disputes. I’m not going to get into a discussion of labor relations, but if you’re in midlife and trying to earn as much as you can, you’re basically like a striking steel worker. You want as big a piece of that added value as you can possibly grab. Hit that picket line!
Anyone who works for a living is in the middle of a value creation tug of war. It’s a war being fought on three, or perhaps four levels. At the industry level, your income depends on how much value the industry creates. The paper clip manufacturers are low value adders, so their wages are going to be low. The surgical tool manufacturer wages are going to be higher. Then, there’s the company level. If your employer is not good at making a profit from value creation, your wages will suffer. For example, if there are competitive factors that cut your employer’s profits, your wages will suffer.
Then, there’s you. Your income is determined by the amount of leverage you have to seize your fair share of the value you create. The more skilled you are, the more central you are to the value creation process, the better you will do. The person who has the machinist skills to make the surgical instrument will be highly rewarded. It’s even possible that the machinist personally creates the specific competitive advantage for the entire product. That person should be extremely well compensated, though in my experience, this individual is often under-paid when the full value of what he or she creates is taken into account.
The fourth level of the tug of war is national. The paper clips vs. surgical tool example is, in simplistic terms, a comparison between China and Germany. Germany has apprenticeships for highly skilled industrial workers who turn bits of steel into very valuable products. China is trying to climb up the value addition chain, subsidizing higher value-adding industries, such as aircraft manufacturing. What is the US doing? Not so much. More to come on this very important topic.