Just a quick thought today. When we, economist or otherwise, talk about the opportunity cost of time, the most common default is an individual’s expected wage. This ends up becoming a sort of implicit numéraire, a unit of measurement and exchange that captures value of an individual’s time.
Now, to be clear, this is a gross reduction of the complexity of opportunity cost and decision-making, but such reductionism is a necessity when observing the world on a day to day basis. People are generally, I hope, aware of this reductionism, but also understand that cognitive tractability is a necessity for getting through life. That also means, however, that there is no shortage of traps. If you reduce decision-making to a single variable equation, you can get yourself in a lot of trouble picking the wrong variable.
Which brings me back to expected wage as a single variable numeraire revealing the opportunity cost of time. Sure, such a simple model is a great way for understanding why high income CEO’s outsource and delegate so many of their “life maintenance” tasks while I, for example, do not. That same logic, however, can be a trap when looking at decision making at the other end of the income distribution. Why wouldn’t someone making minimum wage leave work to pick up their sick kid from school or bail their cousin out of jail? Their forgone wages, their opportunity cost of time, is relatively low, right?
Actually, no, it isn’t. In fact their opportunity cost of time is exceptionally high, it’s just that you’re using the wrong numeraire. The opportunity cost of time isn’t the wages foregone, but rather the additional risk that they are taking on. It is quite common for individuals to lack the precautionary savings necessary to maintain solvency and housing stability during a dip in earnings or unexpected job loss. Nobody likes asking their boss if they can leave work for two hours on no notice when they can’t afford to risk losing an extra shift, let alone their job. The opportunity cost of their time is best measured in the marginal probability of household economic catastrophe rather the explicit wages gained or lost.
A lot of economic decision-making is easy to make sense of when you get your single-variable numeraire right, but that is easier said than done. A good rule of thumb: if someone else’s decision-making looks grossly irrational to you, you probably aren’t using the right variable.
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