Apple has recently come under fire for the low wages paid to its retail employees, the sales "specialists" and technical support "geniuses." According to a recent New York Times article, Apple is doing something "unique in the annals of retailing". It pays "a modest hourly wage, and no commission, to employees who typically have college degrees and who at the highest performing levels can move as much as $3 million in goods a year."
Undergraduate students learn that, in a competitive market, wages are equal to the marginal value product of labour, that is, the dollar value of what the marginal worker produces. Formally, w=p*MPL where w=the wage rate, p=the price of output and MPL is the marginal product of labour.
The proof of this proposition is simple: if an additional worker produces goods and services worth, say, $12, and the wage rate is, say, $10, hiring more workers adds to the firm's profits. Thus, if the marginal value product of labour is greater than the wage rate, the firm will hire more workers. Eventually, however, as more workers are hired, their productivity will start to fall. For example, the additional workers will take on lower and lower value tasks. Once the marginal productivity has fallen to the point where w=p*MPL, the firm stops hiring.
By the same reasoning, if the wage rate is more than the value of what a worker produces, the firm will fire workers. The only possible equilibrium is one where wages are determined by productivity.
Note that I'm assuming the market is competitive, so no one firm's hiring decisions has any impact on the prevailing wage rate, and each firm is too small to have any impact on the market price of its output.
Apple's policy of no commissions and moderate wages might appear to violate the "workers are paid the marginal value product of labour" rule. After all, according to the New York Times, "Divide revenue by total number of employees and you find that last year, each Apple store employee — that includes non-sales staff like technicians and people stocking shelves — brought in $473,000." If one tenth of the value of Apple store sales can be attributed to their retail employees, that would imply an average annual salary of $47,300, and a typical employee makes closer to $25,000.
"The marginal product of labour" is an abstraction. The idea is simple enough – what an additional worker brings to the production enterprise – but the implementation is not.
For example, think about the simplest possible production technology: one worker + one shovel digging a hole. Without the shovel, the worker produces nothing. Without the worker, the shovel produces nothing. Together, they produce a hole in the ground. What is the "marginal productivity" of the worker? Of the shovel? It's like the sound of one hand clapping – it's impossible to tell what each member of the production process contributes.
[Update] Another way of putting this is that the very idea of a marginal product only makes sense with certain types of production functions, ones for which it is possible to make small adjustments in the quantity of each input used. For example, if I am making a cheese sauce from scratch, I can work out the 'marginal productivity' of cheese, the amount of extra deliciousness added by each additional tablespoon of grated cheese. When input ratios are fixed, however, the marginal product calculation makes less sense. For example, making a white sauce from scratch requires a fixed ratio of flour and milk (2 tbsp flour to each cup of milk); any less it's too runny, any more it's too thick. The marginal productivity of flour is at first very high (without it the sauce couldn't be made) and then abruptly drops to zero. The sudden drop in the productivity of, say, flour means that the marginal product is – at the point where the marginal product function is discontinuous – undefined.
With fixed-input-ratio production technologies, like one shovel/one worker, allocating the profits is like dividing a pie. When two parties are bargaining over who gets a pie, no one will ever accept less than their outside option – the amount that she could get if she walked away. If the worker's outside option is $10 per hour, he will never accept any wage less than $10 per hour; if the outside option is $2, a wage of $7 starts sounding pretty good.
Outside options explain why Apple can pay its workers a fairly low wage. If a typical Apple specialist or genius walked away from their job, their next best alternative might be an even worse retail position.
Could Apple just walk away from its employees? At an individual employee level, it can – there are more people looking to work at Apple stores than positions available. The picture to the right suggests that Apple might be able to walk away from its specialists at a collective level, too.
That is the basic problem with the argument that Apple workers should earn high wages because they sell products with thousands of dollars. Ultimately, it doesn't matter how much you sell, if you can be replaced by a vending machine, you are in a weak position to bargain for a higher salary.
Worthwhile Canadian Initiative 
Determinant,
The figures quoted in the NYT and the link I provided are for Apple retail stores, does not include other distribution channels.
Bob,
You might be surprised some Apple stores are huge: http://www.google.com.au/search?q=biggest+apple+store&hl=en&safe=off&client=safari&rls=en&prmd=imvnsu&tbm=isch&tbo=u&source=univ&sa=X&ei=rLYYUKqqIsiZiQfZ3oHYBQ&ved=0CHAQsAQ&biw=1254&bih=1284
Not as big as department stores but huge for a store that carries only a handful of different products.
Apple pays its retail employees shit wages because Apple prefers to operate in jurisdictions where strikes are broken with tear gas and rubber bullets… and produce its goods in jurisdictions where strikes are broken with machine guns.
Marginal productivity my arse.
– Jake
Frances: From the August 1 Wall Street Journal,
Article titled “High Marx For China’s Wages”, by Tom Orlik:
“There’s no problem with China’s labor productivity. The World Bank estimates that output per worker has grown more than 8% a year since the mid 1990s. But a glut of workers means wages have stayed low. Most of the benefits of rising productivity accrued to owners and investors in the form of higher profits.
“Now, though, a demographic shift means a change from excess supply of workers to excess demand in China’s labor markets. Data for the second quarter show that despite a sharp downturn in growth, there are still more vacancies than there are workers to fill them.
“The impact of that shift on the distribution of income is already starting to appear. In the first half of 2012, average wages rose 13.1% on-year; profits were down 2.2%.”
Wonderful stuff – and I don’t want to get off topic – but Nick, “the price of wheat” – in Canada? Isn’t the price fixed? (Agreed, in a perfectly competitive world the producer is a price-taker so from the quantity setting perspective it shouldn’t make a difference, but if the price is fixed of course he isn’t going to think about how his output affects the price. He should be thinking about how his output effects his revenue less costs.)
@rsj – I am still convinced that most competitive industries including convenience stores, painters, etc. are not profit maximizers. Certainly the ones I talk to don’t consider the cost of their staff vs their staff’s contribution. If you can pay $40k or $25k to fill the position, they will choose the $25k regardless of the benefit (and where I work, the business is losing far more than $15k by not having truly effective staff).
DavidN:
I wasn’t trying to rebut your arguments, just trying to illustrate that market power and the use thereof is not a negligible concern when analyzing how Apple behaves. I was in the system and so I am trying to pass along my experience and knowledge of that system to the thread.
My point was that Apple is not like General Motors or even a grocery store. Frances’ was tending toward that idea, and I wanted to draw her, and the rest of the thread away from it.
Two additions. In a way what you are saying is that marginal is not the same as average. Yes, Apple’s value-added per employee may be high but that’s an average concept. The other addition – wages for a lot of Silicon Valley companies are a modest component of total compensation. Do these employees receive stock based compensation such as stock options?
pgl:
No. That’s reserved for executives. If you can be outsourced (see my previous posts), you don’t get stock options, as a rule.
Jake: “Apple pays its retail employees shit wages because Apple prefers to operate in jurisdictions where strikes are broken with tear gas and rubber bullets”
Jurisdictions like Toronto, New York, Montreal? Really? Its manufacturing workers work in locations where strikes are broken with real bullets and visits by the local “security” service in the middle of the night (notably a certain commie dictatorship that shall remained unamed), but that doesn’t really tell us much about its retail workers in, say, North America (which was the subject of the OP).
PGL, I think the average vs. marginal distinction is crucial. Frances’ initial observation was the Apple’s average revenue per worker at each apple store was something like 20 times their average wage ($470,000 vs. $25,000) and she wondered if this didn’t raise questions about whether apple paid its workers the marginal product of labour. But if you step back and think about the cost structure facing the apple store, that result makes sense. Indeed, one would be shocked if the average revenue per labour wasn’t 20 times the average wage per worker.
Think about, let’s say the Apple store sells, on average 100 ipads per worker at a retail price of $500 (this isn’t the reality, but a simplication to illustrate the point. Gee, the average revenue per worker is 20 times the average wage ($500,000 vs. $25,000). Ok, but Apple Stores have to pay for their inventory (I don’t know if Apple Stores are organized as separate legal entities from Apple, but even if they aren’t, they would be charged the wholesale price internally). Let’s say they’re retail price reflects a 100% mark-up (probably not unrealistic), so that their average cost per worker for products is $250,000. So apple workers have to bring in revenue that’s 11 times their average wage just to break-even, ignoring all other costs. Toss in overhead, rent, cost of capital, allowances for theft or breakage, training, yada, yada, yada, it isn’t at all unreasonable to think that Apple just breaks even on the last worker hired.
DavidN, I’ll defer to you on the point (what can I say, I’m a blackberry man). The main point, which I think isn’t disputable, is that the Apple Store does set itself up in premium locations.
Also, I wonder about Frances’ title “the marginal productivity of geniuses: why Apple’s workers earn modest wages”? Are Apple Store workers “geniuses”? No doubt the technicians have a skill set that appears wonderous to a certain generation (i.e., people who weren’t born and raise immersed in electronic gadgets and computers – and I hate to admit it, but I’m probably one of those people. Did I mention I was a blackberry man?) and, in that sense they’re “geniuses”.
On the other hand, my (now) unimpressive ability to resolve (minor) computer problems was once upon a time a source of wonder and pride to my parents – I still get calls from my father to help him back-up documents on word (my parents also think the Apple Store workers are gods). To them (and their generation), I was a genius with computers. Yet, by any objective measure, I wasn’t a genius, I had some very rudimentary skills that just happened to be beyond their ken.
Also, on a last point, the $25,000 figure is a bit misleading, since the article also mentions that Apple has relatively generous benefits including health benefits (not an irrelevant consideration in the US).
As much as I’d LOVE to see commissions or $20/hr starting wages at Apple Stores, in comparison to other retail, the wages are pretty good and the bennies are spectacular, but people are sworn to secrecy about that so…