The peanuts + 2.8% fallacy: why (some of) the poor stay poor

Hi guys, I have been discussing the issue of climbing the right career ladder with my reader Amanda recently and this prompts the question, I wasted a lot of time when I was younger in poorly paid jobs - gosh, the reason was that I really struggled with the transition from student life to working life in my 20s. I was a great student, a scholar in fact but being a good student at school or university is so different from being able to function well in the working world. Fortunately, I have managed to come a very long way - I have learnt from my many mistakes and have now found myself in a good position working in a niche area of investment banking. So I look back at the many people I have crossed paths with in the last 22 years of my working life, some have gone on to become even more successful than me, others have remained trapped in very poorly paid jobs. They say that a man should not be judged where he started but where he is today and what he has achieved along the way; thus this begs the question, why did some of my former colleagues end up so successful and why did some really struggle to make anything of themselves? In today's post, I will analyze a few key factors that determine whether or not people end up earning millions or peanuts in the long run by examining a few case studies and seeing what lessons we can learn from these stories - obviously, I have changed all their names to protect their identities but the stories are real and no I am not trying to make any kind of personal attack on these friends.

I got thinking about this as I talked to Amanda about my friend 'Charles' who was a former super model around the period 2000 to 2005 - I knew him through gymnastics and he was at the top of the world then, he was so talented that he was forced to choose between training three sports: trampolining, gymnastics and diving to see which would be his best bet for a medal at the 2004 and 2008 Olympics. He was also devilishly good looking and this didn't go unnoticed - he started modeling to supplement his income whilst training and started landing huge contracts. He would be paid £20,000 for a shoot that would take two or three days. He was on top of the world then he got injured whilst training, so he had to give up his Olympic dreams but he was still able to continue his modeling career for a while. But once he was out of that sports environment where he was training everyday, he lost his perfect body and at the same time, he started going bald - his modeling career came to an abrupt halt as a result of him no longer having that perfect six-pact and full head of hair. At the same time, he was in a relationship and his girlfriend became pregnant. He decided to marry his girlfriend and take care of his young family, but Charles then realized, damn I have no real skills or qualifications. It used to be so easy to make money as a model when he was younger but the only job he could get was at the post office depot sorting packages. He thought, oh well - it's an awful job but that's okay, it's just a short term thing an I'll do it just to get my wife through her pregnancy, then something better will come along after the baby arrives and that is just a few months away. 

Fast forward to 2022, guess what? Charles has two children today but he is still working in pretty much the same job, loads of people have been turning to online shopping during the pandemic and hence Charles is still gainfully employed doing that same job, but he is trapped in poverty. Amanda made an innocent but misguided comment in which she suggested that "perhaps he could try to get a job higher up the ladder in that industry" and I had to then point out to her that she has fallen into the "peanuts + 2.8%" fallacy which traps working class people in poorly paid jobs. The fact is, you don't become the next Jeff Bezos by working in an Amazon sorting depot; there is a separate recruitment programme for highly qualified graduates to enter management - these trainees are parachuted in from the top universities rather than sourced from those working in the sorting depot. In fact the only way for someone doing a lowly paid job in sorting/delivery to access one of the better paid jobs in management is to resign, go get a degree at a top university and then reapply via the graduate recruitment programme. But using Charles as a case study, he is a father with a family to support - he cannot afford to simply stop working as he is in fact the sole breadwinner for his family. He doesn't have enough savings to sustain his himself and family for three years whilst he becomes a full time student again, therefore Charles has very little choice but to just keep working in his role and trying to climb that career ladder, but allow me to demonstrate to you why that awful career ladder is designed to trap working class folks like Charles in perpetual poverty. 

Let's use Starbucks as a case study: in the UK, there is a clear career ladder for those who start at the bottom with Starbucks. you start as a cafe assistant at £8.40 an hour: you're cleaning the toilets, clearing the dirty cups away and you're the lowest of the low. Then you get promoted to barrista when they actually allow you to make coffee at £8.99 an hour. There is then some progression when you get promoted through the ranks: shift manager, supervisor, assistant manager and store manager. But let me to show you the maths behind where I got the "peanuts + 2.8% formula": as a shift manager, you're paid £9.64 an hour but when you get promoted to supervisor, that pay goes up to £9.91 an hour - that's a pay rise of £0.27 and when we divide £0.27 by £9.64, you get the figure 0.0280083 = a pay rise of 2.8% as you get promoted to supervisor. So if we start off with a very small bowl of peanuts and I increase the number of peanuts in that bowl by just 2.8%, you're going to end up with a very slightly bigger bowl of peanuts but actually,little has changed. It is still a tiny bowl of peanuts after the pay rise. That is why people like Charles who find themselves at the bottom of the food chain are trapped in a cycle where they can work decades in the same role, desperately trying to climb a career ladder that only offers tiny pay rises to the magnitude of around 2.8% each time they get promoted - before you know it, one day, Charles wakes up one day and he is already an old man in his 60s, ready to retire and he realizes that he is still earning peanuts after offering many years of loyalty and hard work to his employer. That may sound quite harsh but unfortunately for Charles, such is the brutal nature of capitalism and why the poor will stay poor, whilst the rich get richer. 

When Charles was a supermodel, he was easily earning around £150,000 a year - that figure would vary depending on how many shoots he does but when you're that rich, you don't worry too much about finding enough work. If he had been smart, he would have realized that the good times weren't going to last forever - he should have saved and invested the vast majority of that money for his retirement or at least used it as seed capital for a business, but he spent most of it on a lavish lifestyle and has little to show for it today apart from some incredible stories like this one he told me, "I remember back in 2004 after London fashion week, when my mates and I were invited to a party in Monaco by one of the French designers, so we flew down to the south of France on a private jet - okay, it was chartered with Netjets but still, we had the whole thing to ourselves. We then realized we couldn't actually land that thing in Monaco itself as they didn't have an airport there in Monaco, so we had to land in Nice but we then got a helicopter over to Monaco and you might think it was really fun, but it was so windy that day and I had already drank so much champagne on the flight to Nice that I promptly threw up in the helicopter - you should have seen the look on that French helicopter pilot's face. He said a lot of angry things in French as I literally threw up on him. I can't blame him, it was so horrible - it was like projectile vomit, it went everywhere but I don't speak French! I remember saying sorry to him whilst still vomiting as I knew it was so disgusting!" 

So if you're earning £20,000 a year (which is pretty generous for someone working in a sorting depot/delivery type job) and you're getting an increment of 2.8% with each promotion, how many times do you need to be promoted before you hit that figure of £150,000? He would need to be promoted 72.964 (let's round that up to 73) times before you could reach that figure of £150,000 but the harsh reality is that people working in such roles never get promoted that regularly because of the pyramid shaped corporate structure. There are many people working in the most lowly paid jobs at the bottom of the pyramid, significantly fewer in middle-level management and then a tiny number at the very top of the food chain. So someone like Charles who takes on a lowly paid job may find his first few promotions relatively accessible but they become harder and harder to attain the further up the food chain he goes - given that he dropped out of school with no former qualifications, he is always up against and losing to his colleagues who are better educated and have more skills. Charles is already in his 40s like me, never mind being promoted 73 times, he would be lucky to be promoted once or twice more and even then, we go back to the peanuts + 2.8% situation - it still would make very little difference to his financial situation. Charles is stuck on a career ladder that is painfully hard to climb and even when he does manage to climb up one more rung of that ladder, he is still a really long way away from ever earning the kind of money that would give his family a comfortable standard of living - unfortunately, Charles' family are actually living in poverty now and that's pretty ironic given that we're talking about the very same guy who threw up in the helicopter over Monaco back in 2004. 

If I may draw in another one of my friends whom I have mentioned a lot in my blog, I have shared the story of 'Vera' - she is in her mid-30s and worked many years as a personal trainer. She found herself very broke, living from pay check to pay check and there's just no way she could ever get on the property ladder in London. So she realized that she was on the wrong career ladder, she would never become financially stable working as a personal trainer. She contemplated doing a law degree in order to change careers, but instead, much to my dismay, she went to do a degree in photography. At a time when even teenagers have stunningly powerful cameras on their mobile phones, Vera decided to do a degree in photography. Where do I even begin? I asked her why she decided to do a degree in photography, she said it was something she was interested in and passionate about. I then asked her if she thought she would be able to get lucrative work as a photographer after she got that degree and she said, "I think so, if I am good at what I do then of course I will get work." I left it at that - what then happened was the pandemic hit, so many opportunities for paid work for photographers dried up overnight. So for example, photographers are often hired for big events (weddings, product launches, baptisms, even just rich people having birthday parties) but the vast majority of all that were either canceled or drastically scaled back as a result of the pandemic. So no matter how skilled Vera was on paper as a photographer, there simply wasn't a demand for her services at all - ironically she had to go back to personal training just to make ends meet.

So in Vera's case, she is actually financially worse off after having done this degree in photography because that meant only working part time as a personal trainer whilst she was a student and paying a lot of money for that degree. She was hoping that it would lead to more lucrative work in the long run but so far, nobody is lining up to pay her to take pictures. I look at her Instagram from time to time and I see her posting artistic photos, like the reflection of a tree in a lake, with every detail beautifully captured in the crystal clear water and it was beautifully lit by the setting sun. Was that a beautiful picture? Of course it was, I loved it and even gave it a like. In fact, she got loads of likes for that Instagram post as it is certainly a great photo. Would it lead to lucrative paid work? I don't think so. Is Vera a skilled photographer? Undoubtedly so, but is she able to monetize her skill? No, for the moment, she cannot. So in the case of Vera, her situation is quite different from Charles - she had overestimated her ability to make money as a photographer and the pandemic greatly reduced a lot of opportunities for her; in hindsight of course, she might have pursued a totally different degree instead; maybe something related to healthcare given that we're in the middle of a pandemic and we need more healthcare professionals, not photographers. But hindsight is 2020, Vera is left frustrated and wondering if she could hit the reset button by doing yet another degree in something else - this is a woman who gets 10 out of 10 for effort but 0 out of 10 for results when it comes to trying to attain social mobility. Poor Vera is trying hard but success somehow keeps eluding her. 

Now I've talked about Charles who went from rags to riches back to rags, then there's Vera who started with rags and is still stuck there but what about people who went from rags to riches? I have a nice success story I'll like to share with you because it would be depressing to just focus on the problems that Charles and Vera have faced. I've picked my friend Jeff (not his real name) as he took a very realistic path to success. Jeff left school without any formal qualifications because he had a very chaotic upbringing, his parents were separated and paid little attention to him. However, what he lacked in paper qualifications he made up with street smarts - when he moved to London, he was looking for a place to live and thus he did the usual thing back then (this was many years ago) which was to approach an estate agent. The estate agent he dealt with was so incompetent that Jeff thought, damn I could do a much better job that this idiot and it's not rocket science, is it? Just turn up, show the customer the property and then seal the deal. Jeff felt quite indignant because he felt compelled to deal with that incompetent estate agent because he really liked the property he looked at. Thus he signed the contract (albeit very begrudgingly) with that estate agent and decided at that moment, that he was going to become an estate agent as well. He started from the bottom and managed to work his way to the top - he is dealing with high end luxury properties now and he earns a lot of commission each time he makes a sale given how much these properties in London cost. Admittedly this is not the most glamorous job in the world, but Jeff is earning a lot. 

This begs the question: could Charles and Vera become estate agents too and follow in Jeff's footsteps to attain success that way? I don't know - trying to say "yes" to that question would be assuming that what Jeff does is so easy that anyone could do it and that would be wrong. There are so many estate agents out there and some struggle to make ends meet whilst others are extremely successful. But let's look at what Jeff did right: firstly, he went into sales and thus he had broken out of the 'peanuts + 2.8%' cycle. He was no longer dependent on his management giving him a pay rise - if he wanted to earn more money, he simply had to work harder, sell more and thus earn more commission. Charles had unfortunately been sucked into a 'peanuts + 2.8%' role and whilst Vera has avoided that trap, she is stuck with a skill that isn't in great demand at the moment - so it's not like she is bad at her job (I'm sure she is brilliant at photography) but she had picked the wrong career given the lack of demand for photographers at the moment. Whereas for Jeff, he is working in property and people will always need a place to live, that's not something like a photographer which is an optional extra that we can do without. Thus even though it wasn't a major consideration when Jeff decided to become an estate agent all those years ago, this factor actually makes his choice of career a really good one. Of course, Jeff has excellent social skills and builds good rapport with his clients - he also gets a lot of referral business from former clients who tell their friends, "you need to speak to Jeff in London. I've used him before and I swear he is the best estate agent in town." 

So if I may point out one key difference between Jeff and Charles, it is that Jeff has excellent social skills whilst Charles is somewhat lacking in that department. I guess if you grew up with the good looks of a supermodel, you're quite used to people being attracted to you. Whereas in the case of Jeff, let's just say he was never going to make it as a model but I suppose people like Jeff and I feel the need to compensate for that by being nice to people. We know that people aren't going to be attracted to us based on our physical appearances, so instead we have to be funny, kind, caring, helpful and nice to people instead if we want to make friends with them. The irony is that Charles' super model good looks didn't last that long but because he spent the first half of his life looking so incredibly beautiful, he is having a hard time adjusting to the fact that he can no longer rely on that physical attraction anymore. Actually I feel sorry for him because I know he is having a hard time, he was a good friend to me in the past and I hate to see my friends suffer. If Charles wants a change of career to improve his prospects, then he needs to take quite drastic action (the way Vera actually did); but we're in the middle of a pandemic-induce recession and now is hardly the right time for a man in his 40s to try to find a brand new job in a new industry. He should have thought about this years ago but you know the saying, you can bring a horse to water but no, you can't make it drink. Hence I really do not want to be giving career advice to a man who has not asked me for my opinion and so I mind my own business when it comes to Charles being stuck on this 'peanuts + 2.8%' career ladder. 

I would like to end by telling you about something else altogether to give this piece some balance, I don't want you to think that I'm looking down on Charles and feeling sorry for him. I met Charles through gymnastics years ago and I am still involved in my local gymnastics club as a volunteer. One of the coaches has just become a father - his wife gave birth to a pair of twins and the other coaches are organizing a little gift basket for the family. The coaches there don't earn much (yup, I know how much they earn) but they seem to have a blissful, peaceful lifestyle where they aren't that stressed. If the gymnasts fail to learn a skill, they would say, "oh it's okay sweetie, don't be too hard on yourself. This is a really difficult skill and if it was really that easy, everyone would be doing it. You've made some great progress today, well done for that. Now go get some rest, relax and come back next session refreshed, okay?" I've had a really stressful afternoon at work today - I'll spare you the details but it is one of the reasons why I hate working in a team because of potential conflicts with other team members. But unfortunately, it only works out financially if I work in banking where I can earn a lot of money and volunteer at the gym, I can't turn that around and be a full time gymnastics coach whilst dabbling in finance. It just doesn't work like that - there is a price to be paid if you want a well paid job and at times like this, I do think about Charles in a warehouse somewhere near Birmingham feeling quite bored at work but at least he isn't facing the kind of pressures that I am at work. Likewise, I see the coaches at my gymnastics - sure I earn a lot more than them but I suspect that they might be a lot happier than me at work? But I'm sure at the very least, they are a lot less stressed: it is two sides of the same coin. Or am I imagining that the grass is greener on the other side of the fence? 

So there you go, I shall there but what do you think? Have you ever met anyone like Charles, Vera or Jeff? Why do you think Charles and Vera are stuck in poverty whilst Jeff managed to attain social mobility? Would you feel sorry for Charles or do you blame him for his own plight? Is there any hope for someone like Charles to get out of poverty or is it too late for him given that he's already in his 40s? Do working class people realize they're stuck on a "peanuts + 2.8%" career ladder? Will you try to help a friend like Charles then?! Do leave a comment below and many thanks for reading.