The Labor Market - Live to Work, or Work to Live?

Himalaya.
You're listening to Think like an Economist, a Himalaya Learning production.
For exclusive content like bonus episodes and supplemental materials for
this podcast and others like it, go to Himalaya dot com,
slash econ and enter promo code econ eco and a
checkout to get your first fourteen days free. It's time
to Think like an Economist.
My last job, I worked as a domestic violence advocate
at a nonprofit organization. I did a lot of social
work type things, so working in courts, working with victims
of domestic abuse, working with offenders. And I had left
that job right at the time that I had my
second son, and I absolutely loved it. It was something
that I knew that I wanted to do for the
long term and I wanted to build my career there.
This is Megan from Maryland and her job didn't just
help pay the bills. It also brought her a lot
of satisfaction and it's sense a purpose.
It was something that I was very passionate about. I
loved working with people one on one, working with people
in the community. I got to know people very well.
And the other organizations that I worked with, like the
police department and the court system. Every day was like
a fire that I needed to put out, and I
kind of lived for that adrenaline rush, knowing that there
was probably going to be a crisis of some kind
that I would need to help with.
But after having her second child, Megan couldn't afford to
work anymore. That may sound like a contradiction, but because
of childcare was just too high.
It was really hard to leave that job. And I
still really love that job. That's what I was meant
to do and where I was meant to be.
This is a dilemma a lot of parents' face, and
it's one of several issues which impacts how much and
weather people decide to work. But first we're going to
look at decisions which go into hiring. On this week's
episode of Think Like an Economist, I'm Betsy Stevenson.
And I'm Justin Wolfers. On this podcast, we aim to
transform your life through teaching you the superpowers of economics,
and NaSTA and Tabacoli far joins us.
This week is about the labor market, which is both
a huge topic and also really relatable for all of us.
That's right, and it's already come up in a few
of our episodes so.
Far, The labor market can seem a bit tricky at first.
So far we've been talking about businesses making products or
services and buyers purchasing them. Supply and demand. The thing
we need to get used to now is it in
the labor market. It's workers who supply their labor and
the employers who demand labor when they hire them.
So I sell my labor to the University of Michigan,
my labor being my world class expertise in economics. The
University of Michigan wants to hire top economists, so they
demand my labor. Or you could say, they buy my
labor by paying me a price for it. That price
is also known as my wage. I'm a seller of
labor and the university is the buyer.
I guess most of us don't think of ourselves as suppliers,
So we need to get to grips with the facts
that we are suppliers selling our labor. So, as always,
should we start with demand.
Let's do it.
So.
Now businesses are demanding things, they need people to work
for them.
Let's start with deciding how many workers to hire. Here
we bring in the marginal principle, so When a boss
asks how many workers should we hire? They really need
to break the question down into should we hire one
more worker? And to do this, they need to figure
out how much extra revenue each worker brings to the business.
We call this a worker's marginal revenue or marginal revenue product.
If a business wants to know whether they should hire
an extra worker, they need to make sure the extra
revenue which this worker brings to the business is more
than the extra cost of hiring this worker.
Or an economic speak, the marginal revenue or worker brings
in needs to be more than the marginal cost of
hiring them, and the marginal cost is just the wage.
In our episode on the marginal principle, Samir from Milk
Or Coffee Roasters in California told us about how he
decides how many barristers to hire. You can go back
and listen to that episode for the full details, but briefly,
we heard that his first barrista brought in a few
hundred dollars for the business, and the cost of that
barrister was about one hundred dollars. The second worker added
about half of that, and worker number three added about
a third of that. It made sense for Samir to
hire two barristeras.
Employers need to make sure that the money an extra
worker brings into the business is more than the cost
of that extra.
Worker, and so I guess if the wage falls, it'll
be cheaper for Samir to hire more people. What else
can changes demand for workers or rather barristas in this case.
Anything that changes demand for coffee drinks will change Smirs
demand for barristers. Say, coffee becomes more popular, so people
are willing to pay more for his delicious coffees. This
makes the work that his baristas do more valuable, making
it more likely that it'll be worth hiring more of
them after that.
The demand for labor is also closely tied to capital goods.
These are the tools of machinery that workers use to
do their jobs for Samir. If espresso machines become cheaper
than its, baristas can make more coffees, so they add
more to the business. In this case, coffee machines are compliments,
as these expresso machines help the baristas do their job.
Machines can also replace workers. Vending machines are an example,
as they do away with making your drink altogether. This
type of capital good is called a substitute as it
can do the job instead of a worker, and just
such a state of the art vending machine drops in price, well,
there'll be a lot less demand for a barista as
a machine can do their job instead.
It's actually worth thinking about this when you're choosing your career.
If your job involves routine tasks, well, then it's more
likely that machines or robots will end up replacing your
job in the future. In high skilled jobs, labor and
capital goods are more likely to be compliments. For example,
specialist software can help an engineer do their job more easily.
High skilled jobs are a safer bet for the future,
and they usually require a lot of education.
I think this question about robots and technology is really important,
as so many of us are talking about this and
even freaking out about whether technology is going to replace
us all.
It's also important to pay attention to other costs that
employers pay. Some jobs have benefits like healthcare or paid
sick leave, and bosses contribute to these programs. These raise
the cost of a worker. Sometimes the government will give
business owners tax cuts so they can provide these benefits
and hire more people, but at the end of the day,
what matters for employers is what it costs them to
hire an hour of labor, and that's their all in
compensation cost, not just the wage.
That's how employers see it. Now, let's flip the picture
to a worker's perspective, moving from labor demand to labor supply.
Because workers are suppliers of labor.
We'll need to sort out what motivates people to work,
how much to work, and at work price. We're going
to bring in some of the core principles to do this.
The most important thing you need to think about, NAZ
is the opportunity cost of working. What would you be
doing if you weren't working on think like an economist.
So I may take on other work, or spend some
of that time catching up with a friend or doing
something fun.
Great economists often call the time spent not working leisure time.
That word drives me crazy. When I'm not working at
my job, I'm often working on essential chores around the house,
looking after my kids, or doing some other form of
work that isn't paid. When economists say leisure, they don't
mean you're just sitting around doing nothing. They're talking about
the time and you're not being paid for work, so
when students are studying, economists call it leisure, even though
it is still a lot of hard work.
Next, we're going to bring in the marginal principle. When
you're thinking of supplying your labor, NAS, you might think
about how many hours to.
Work, but hang on, a lot of jobs are still
nine to five though, So how much choice do we
really have when it comes to how much of our
labor we supply.
That's true, but there are also jobs where you're hired
by the hour, the day, or the week, or you
might work on commission like a real estate agent and
so get to decide how much to work each week.
Other people working in salary jobs will put in more
effort if that changes the chance that they get to
raise our promotion, that might make a big difference in
their future income. Sometimes we stay late at work or
put in long hours for the chance to earn more
in the future.
And if you caun't work more hours at your current job,
well you could take on a second job.
NAS. If you thought you could earn another, say eighty
dollars by working on a Saturday, would you do it?
No?
I mean I need that time to clear my head
and clean the apartment, and I'd probably spend all the
money I'd earned getting takeout and hiring a cleaning service.
Now, what if it was eight hundred dollars for the Saturday.
For eight hundred dollars, I probably would because I could
cover the cost of cleaning my apartment and getting take
out for the rest of the week.
The opportunity cost is what manners here, which is the
alternative use of your time. The more hours you work,
the more important alternatives you're being forced to give up.
At some point, you can't hire someone else to eat
for you, and you just need a break. You miss
your family and friends if you don't make any time
for them.
I hope there's a point where I'm making so much
money that I want to cut back on work to
enjoy more time with my friends and family and to
enjoy life.
You're thinking about something economists call the income effect. When
your wage goes up, you're richer, and if you're rich
enough that you can already pay your bills and other essentials,
the thing you might want most is to buy more
time for yourself. You can do this by working less.
The opportunity cost of working. It's actually a really big
consideration for people who take care of others. Say you
take care of an older relative or someone with health problems,
or you're a parent with small children. If you're not
taking care of these people, you'll have to pay for
someone else to take care of them, and that could
be really expensive. You'll also miss the opportunity to be
with someone you care for when they need you most.
Earlier, we heard from Megan, who lives in Maryland. She
told me about a dilemma she faced, which is familiar
for many parents.
I have two children. I have a daughter who is six,
and I have a son who is two, and I
have been a stay at home mom since my son
was born about two years ago. The last job that
I had I was working as a domestic violence advocate.
I was earning just under three thousand dollars per month
after tax, something that I was really invested in and
I loved, and I had a great boss and co workers.
It was really like where my passion was at that time,
and I think still is as I still have days
where I wish I was there.
And how does it feel not going back to that job,
especially given you loved it so much?
It's definitely a little heartbreaking. I went through kind of
a morning process after I left. I have days that
are really good days that I love being home. I
also have really hard days where I wish, I wish
that I was back.
She had to leave her job after having her second child,
as child care for both her kids was too expensive.
There were very few options. We were looking at spending
anywhere from like five hundred to seven hundred dollars a
week just for the two of them. It would have
been around two thousand to two eight hundred dollars per month.
And you were earning around three thousand dollars per month
after tax.
Yes, so right there, we can see Megan would be
paying almost the same amount for childcare as she was
earning from her job. Unfortunately, this is a very real
problem for many parents, actually for many women.
And so, Megan, given in your last job you were
earning around three thousand dollars a month, what's the maximum
childcare cost that you'd pay where it would be worth
it for you to return to work.
It would make sense if I could find a daycare
where I would pay between one thousand, two hundred and
one thousand, six hundred dollars a month for both my children.
It would be extremely helpful if there were like a
childcare subsidy or something like that that we would qualify for.
I know that the government does offer those very small amounts,
and that's only if you're I think, below the poverty line,
which we aren't currently, or if my work had offered
something like to help pay for childcare, or some of
the larger companies that I know some of my friends
work for, they offer in house daycare services for their employees.
When you're trying to figure out whether to work or not,
it's important to remember the interdependence principle. Your wages tend
to rise over time as you gain more experience. So
if you take time out of the labor market, when
you go back, you'll be earning less than you otherwise
would have. Those lower wages might stick with you for years,
in fact, maybe even the rest of your life. So
these are really difficult decisions for families to make.
Nos Can you think of anything else that may make
you want to work less?
Taxes?
Perhaps, I'm sure of it. Often when taxes go up,
people are going to work less. If you're taking less
money home, what's the point of working an extra hour
day or a week. So higher taxes often reduce the
amount people work.
Okay, well, let's be clear. Economists debate how important this
effect is. Many economists argue that it's pretty minor, but
those economists who disagree tend to argue that lowering taxes
will for people to work a bit harder.
Partly, it depends on the tax we're thinking about. For example,
social Security taxes in the US don't just take money
away from you. They also ensure that later on you'll
get a lot of that money back as a retirement benefit.
These taxes don't lead people to reduce their labor supply
because they value those retirement benefits.
So what's the big picture in all of this.
It's that in many ways, the labor market's a lot
like any market. How many jobs are available and the
wages you might get paid depend on supply and demand.
And that could give you useful insight as you're thinking
about your career. First, on the demand side, think about
your comparative advantage. What can you do more effectively than others?
That's where you'll be most valued and befward looking and
think about careers where the demand for your work is
likely to increase over time. That means focusing on the
sort of non routine tasks that machines aren't very good at,
and trying to find those careers where future technologies will
actually make you you more valuable.
And then on the supply side, as you're making choices
about how hard to work, pay attention to the other
things you could be doing with your time. Realize that
your career isn't just one choice, but a series of
choices over time. And so it might make sense to
work really hard when you're establishing your career and pulling
back on paid work when it's time to invest in
your education or spend time looking after others. And there's
some truth to that old adage about doing what you
love that way. You get paid in two ways, once
in a weekly paycheck and again in that sense of
purpose and meaning that we get from work.
And that's the thing I want listeners to think about
over the next few days. We've talked about the labor
market as if it's all about supply and demand, but
it's also different because it's about people who have thoughts
and feelings and ambitions and families to balance. As you
observe the people in your life over the next few days,
think about how this human element shapes their labor market choices.
Justin Betsy, thanks very much.
To get the most out of this show, check out
our bonus episodes and supplemental materials available only on the
Himalaya Learning platform.
Himalaya Learning provides bite sized courses from world class thinkers
and industry experts such as Arianna Huffington, Malcolm Gladwell, Tim Ferriss,
and Moore for you to enjoy in the app on
the go.
Go to himalaya dot com, slash econ and enter promo
code econ eco n AT checkout for your first fourteen
days free.
It's time to think like an economist.