Sunday, March 7, 2010

Price of Time - Naked Economics IV

This is the fourth and final entry in a series of posts on Naked Economics by Charles Wheelan.

It is axiomatic that time is money. This underlies the very premise of employment: employees exchange their time for the employer's money. Sure, there are some subtleties, like specialized skills or property from the employees and benefits beyond money from the employer (although for enough money you could buy the parking spot with your name on it and the health insurance). Wage and salary are the answer to the question: What is your time worth?

This is not a static number. There are several factors but the two most prominent are the diminishing return of money and the increased value of your time as it becomes scarcer. As you get more money, the same amount is worth less to you. If you were literally starving to death, five bucks for a sandwich would mean everything to you. That second five bucks for dessert would mean a little less. Five bucks to Bill Gates is hardly worth stopping to put in his pocket.

Your time works the same way, although we experience it in reverse. That is, as work begins to take up more of our lives, we have less time and therefore we value each free moment that much more. The result of these two phenomena is that we will work some hours for a given wage but at some point we stop. The same wage will not entice us to work more hours. This often leads to increased incentives - for example, bonuses for hitting a certain number of hours, or time and a half for overtime.

In Naked Economics, Charles Wheelan presents an economic theory about the correlation between wages and the number of hours people will work:
"There is something in labor economics called the 'backward-bending labor supply curve' . . . . Economics theory predicts that as our wages go up, we will work longer hours-up to a point, and then we will begin to work less. Time becomes more important than money. Economists just aren't quite sure where that curve starts to bend backward, or how sharply it bends."
Here is a chart depicting this theory (Public Domain via Wikimedia Commons):
The higher end seems obvious if you take an extreme example. If you made a million dollars an hour wouldn't you work less so you could go out and enjoy your riches more?

Alright folks, that's the end of the Naked Economics series. I enjoyed the book as an entertaining introduction to economics. I have studied economics previously (B.S. in Business, and a J.D. from a law school (George Mason) that heavily incorporates Law & Economics into its curriculum). Despite already knowing the major economic principles, I still found enough interesting new tidbits to make the read worthwhile.

Posted by Philip Miles, an employment lawyer with McQuaide Blasko in State College, Pennsylvania.