Nonintuitive Economics, or Why You (Maybe) Shouldn't Take a Lower-Paying Job
We're in a recession. There are a lot of people who have been out of work for a long time - as many as two years, in some cases. Obama only just signed another unemployment extension into law, after the issue was hotly debated for several months in the Senate.
The opponents of unemployment extension have insisted that the jobless should stop mooching off the system and get back to work, even if they have to take a pay cut to do it. At the individual level, this seems to make sense - if someone can work, even if for less than they were making in good times, it's better if they do work than if they continue to draw extended unemployment benefits.
However, at the level of the economy as a whole, in some cases it's actually better if a more-qualified person doesn't jump into a lower-paying job. To understand why, we need one of the lesser-known economic concepts known as Ricardo's law of comparative advantage.
The concept of comparative advantage, usually applied to international economics, states that the greatest economic efficiency is achieved if each party involved engages in whatever economic activity they're personally best at, even if they're better at something else than another party.
To illustrate this, let's consider two people:
Alice is a professional software developer with over a decade of experience and advanded degrees. If she went to work for BigCodeCorp, an imaginary software company, she could earn $70 an hour. However, she also has good English skills and a head for math; if she went to work for McBurgers as a cashier, she could make $15 an hour.
José is an immigrant with a grade-school math education and poor English. He's only worth $10 as a McBurgers cashier. If the hiring managers at BigCodeCorp were zapped with mind control lasers and hired José to write code, he's only worth $5 an hour, at best.
Alice is a better cashier than José; wouldn't you rather have her at the counter at McBurgers, since she's a lot more likely to get your order right? No, you wouldn't, and here's why.
If you have Alice work for BigCodeCorp at $70 an hour and José work for McBurgers at $10 an hour, put together they generate $80/hour of value. If, on the other hand, Alice becomes a McBurgers cashier at $15/hour and José struggles along at BigCodeCorp for $5/hour, they generate $20/hour between them. It's four times better to have Alice writing code and José asking if you want fries with that.
So that's the law of comparative advantage. However, that example assumes that both people could get jobs, albeit at different rates. How does this apply to a recession?
To understand that, let's introduce Bob, a more junior software developer who's only worth $50 an hour. And let's say that BigCodeCorp only has one job, worth $50 an hour for a one-year contract. Both Alice and Bob can do it - but should Alice apply for the job or wait for a better paying position to come along?
The answer is that she should wait. Let's say Alice and Bob both apply for the job; Alice gets it and starts working at $50 an hour, and Bob is still out of work and drawing unemployment. Three months later, the major e-commerce firm Mississippi suddenly has a new, more complicated task that is worth $70 an hour. Bob can't take that job - he's not qualified. And Alice can't take that job; she's already committed to the $50/hour contract with BigCodeCorp. Result: Mississippi has to wait another nine months to fill the position, and Bob stays out of work.
By contrast, if Alice had passed up the $50 position, Bob would've got it, and three months later, when Mississippi was hiring, she would've picked it up, and everyone wins - people are out of work for less time overall, and jobs that need doing get done.
Our little toy examples differ greatly from the real world. But it does illustrate that it can often be better for everyone involved if more experienced people continue to stay out of work. And we can even come up with an intuitive understanding of why: in a tight economy, if the more experienced pass up lower-paying positions, it leaves those positions open for people who are just qualified enough to take them.
So if you can, hold out for the position you're qualified for. You'll be doing everyone a favor.
The opponents of unemployment extension have insisted that the jobless should stop mooching off the system and get back to work, even if they have to take a pay cut to do it. At the individual level, this seems to make sense - if someone can work, even if for less than they were making in good times, it's better if they do work than if they continue to draw extended unemployment benefits.
However, at the level of the economy as a whole, in some cases it's actually better if a more-qualified person doesn't jump into a lower-paying job. To understand why, we need one of the lesser-known economic concepts known as Ricardo's law of comparative advantage.
The concept of comparative advantage, usually applied to international economics, states that the greatest economic efficiency is achieved if each party involved engages in whatever economic activity they're personally best at, even if they're better at something else than another party.
To illustrate this, let's consider two people:
Alice is a professional software developer with over a decade of experience and advanded degrees. If she went to work for BigCodeCorp, an imaginary software company, she could earn $70 an hour. However, she also has good English skills and a head for math; if she went to work for McBurgers as a cashier, she could make $15 an hour.
José is an immigrant with a grade-school math education and poor English. He's only worth $10 as a McBurgers cashier. If the hiring managers at BigCodeCorp were zapped with mind control lasers and hired José to write code, he's only worth $5 an hour, at best.
Alice is a better cashier than José; wouldn't you rather have her at the counter at McBurgers, since she's a lot more likely to get your order right? No, you wouldn't, and here's why.
If you have Alice work for BigCodeCorp at $70 an hour and José work for McBurgers at $10 an hour, put together they generate $80/hour of value. If, on the other hand, Alice becomes a McBurgers cashier at $15/hour and José struggles along at BigCodeCorp for $5/hour, they generate $20/hour between them. It's four times better to have Alice writing code and José asking if you want fries with that.
So that's the law of comparative advantage. However, that example assumes that both people could get jobs, albeit at different rates. How does this apply to a recession?
To understand that, let's introduce Bob, a more junior software developer who's only worth $50 an hour. And let's say that BigCodeCorp only has one job, worth $50 an hour for a one-year contract. Both Alice and Bob can do it - but should Alice apply for the job or wait for a better paying position to come along?
The answer is that she should wait. Let's say Alice and Bob both apply for the job; Alice gets it and starts working at $50 an hour, and Bob is still out of work and drawing unemployment. Three months later, the major e-commerce firm Mississippi suddenly has a new, more complicated task that is worth $70 an hour. Bob can't take that job - he's not qualified. And Alice can't take that job; she's already committed to the $50/hour contract with BigCodeCorp. Result: Mississippi has to wait another nine months to fill the position, and Bob stays out of work.
By contrast, if Alice had passed up the $50 position, Bob would've got it, and three months later, when Mississippi was hiring, she would've picked it up, and everyone wins - people are out of work for less time overall, and jobs that need doing get done.
Our little toy examples differ greatly from the real world. But it does illustrate that it can often be better for everyone involved if more experienced people continue to stay out of work. And we can even come up with an intuitive understanding of why: in a tight economy, if the more experienced pass up lower-paying positions, it leaves those positions open for people who are just qualified enough to take them.
So if you can, hold out for the position you're qualified for. You'll be doing everyone a favor.