Time Is Money4401650So how much is yours worth?By Emily Oster
Your money or your time? Here's how to calculate it.
Photo by Photodisc/ThinkstockYou know your time is valuable, but
how much is it really worth? As you fume about a delayed plane, a
late doctor, a long line, is it possible to quantifyto put a
concrete number onthe time being wasted? To say not just, My time
is valuable! but Thats $123 of my time down the drain!Emily Oster
Emily Oster is an associate professor of economics at the
University of Chicago Booth School. Her book is Expecting Better:
Why the Conventional Pregnancy Wisdom Is Wrong. Follow her on
Twitter. It turns out the answer is yes. And to do so you only need
to use one of the most basic principles of economics: opportunity
cost.I tell my micro students everything I teach them is important,
but the truth is that some things are more useful than others, and
opportunity cost is near the top. (Yes, I guess I waste some of
their time. Lets not quantify that.) Heres the idea, in business
school terms: Imagine you are thinking of opening a restaurant. You
expect some revenues from the restaurant (I hope!). There are also
some costs: You have to buy the food, pay the waiters, rent the
building. But there is another cost: Youll have to spend all of
your time at the restaurantyou cant have another job. This means
giving up some earningswhatever your salary would be at that other
job. That amount? Thats the opportunity cost. When you think about
whether its a good idea to open that restaurant, you must consider
this cost, just as you consider the cost of the food.
AdvertisementIts not too hard to see how this applies in your life.
How much is an hour of your time worth? Its worth whatever wage you
would get if you spent that hour working. If you work for an hourly
rate, this is an easy calculation. Even if you work for a salary
and a fixed number of hours, the principle is the same: Its
whatever your salary works out to per hour. (I realize that your
boss probably wont pay you more if you work more hours. But you
could always get a second job, probably at the same wage rate, so
dont overanalyze it.) Same logic if you dont work at all: If you
did get a job, what would the wage be?You may be thinking: Dont be
ridiculous, I dont want a second job! I would much rather spend my
free time relaxing, playing with my family, reading a book,
exercising. No problem. The opportunity-cost equation simply tells
you what the cost of your time is, not how you should spend it or
how you want to spend it. If you would prefer to read a book than
work another hour, that says that you value the time relaxing more
than your wage rate. All this calculation gives you is a benchmark
against which to consider what you are doing with your time.OK, so
this is pretty simple. Why is it useful, other than for being able
to vent in very specific terms to a flight attendant? For me, the
crucial application is in thinking about household chores.
Specifically, whether I should do them or not. Consider grocery
shopping. There are really two options: I can order online and have
the groceries delivered by a company like FreshDirect or Peapod, or
I can go out and spend two hours wandering the aisles at my local
supermarket. Theres a delivery fee for the former, maybe a markup
also. So which is the better way to shop? This opportunity-cost
idea makes the decision easy: Is the fee plus markup smaller than
the value of two hours of my time? If yes, delivery. If no, head to
the car. (This grocery example is actually how I learned about
opportunity cost as a child. My mother, also an economist, always
had the groceries delivered. As a 10-year-old I thought of going to
the StopnShop as a glamorous activity and asked why we didnt get to
do this. My mother promptly explained that the other childrens
parents didnt understand the idea of opportunity cost. And that was
the end of that.)Once you start thinking like this, you may find
you are not outsourcing enough. Should you hire a cleaning service,
rather than spending three hours every other week cleaning the
bathrooms yourself? Depends on the opportunity cost of your
timemore or less than the hourly rate for the service? You may
initially think that paying someone to clean your home is a waste
of money or a luxury, but unless you make less than the rate youd
be paying (or unless you actually enjoy cleaning), if youre not
choosing to work in those hours, you shouldnt be cleaning either.
Ditto for laundry, yard work, snow shoveling, and on and on. You
like opportunity-cost theory, eh?Of course, this doesnt mean you
should outsource everything. There may be chores you enjoy. My
father insists on mowing the lawn by himself with a hand mower from
1985, obviously inefficient but seemingly fun. Every few weeks my
daughter and I make a trip to Whole Foods to look around, do some
shopping, eat some free samples. Again, just fun. And while it may
be more cost-effective for you to work late and let a baby-sitter
put your kids to bed, some things are more valuable than money.If
youre still struggling to think about whether some outsourcing is
worth it, ask yourself this: Would you do this chore for someone
else if they paid you the market wage for it? Would you, say, go
grocery shopping for your friend if she paid you the delivery fee?
If not, you probably shouldnt be doing it for yourself either.
Opportunity cost isnt just useful for outsourcing. Consider
commuting. Many people face a choice: spend less on a house and
commute farther, or spend more and commute less. How do you know
how much the commuting is worth in rent or mortgage payment? Its
easy: hours of commuting time per month times your hourly wage
(plus gas, train fare, etc). Thats how much extra you should be
willing to pay to live in the same kind of house closer to
work.Applying opportunity-cost theory wont always change your
behavior but can simply be a useful tool to understand why things
are the way they are. When I was pregnant and visiting my OB every
few weeks, I waited for the doctor every single time. Sometimes for
as long as an hour. I was furious. Didnt they know my time was
valuable? But consider this: Because of the way appointments like
this workbecause they are unpredictable in lengthsomeone will have
to wait. Either the doctor schedules long appointments and
sometimes she waits for you, or she schedules short appointments
and sometimes you wait for her. Doctors are very highly paid, and,
therefore their opportunity cost is very high. For most of the rest
of us, our opportunity cost is lower. If someone has to wait, its
efficient for it to be the person with the lower opportunity cost.
In other words, you.The only inefficiency here is that you cant
outsource waiting for the doctor. Now there is a missing market.TAX
BURDEN: It's official: we're shelling out more, for less benefit,
as the years go byby DAWIE ROODT, August 06 2012, 13:03DAWIE
ROODTTAX BURDEN: It's official: we're shelling out more, for less
benefit, as the years go byHAS the tax burden on the South African
economy actually increased over time, or does it only feel as if it
has? Measuring and comparing SA's tax burden can, like most things
economists do, be made unnecessarily complicated. It is, however,
possible to get a fair idea on our changing tax burden without
crossing all the T's.Relative to gross domestic product (GDP),
state revenue (as measured by the National Revenue Fund) increased
from 23,7% in 2000 to about 25% in 2011. During times of economic
distress, such as during 2001 and 2010, this ratio fell to 22,7%
and 23,7% respectively, mostly due to lower corporate tax receipts
related to a slowdown in economic activities - not to lower taxes.
This trend is expected to increase to 27% during the course of next
year. From this simple ratio it is clear that the underlying trend
in the tax burden has increased quite substantially.Keep in mind
that the ratio mentioned above excludes changes to taxes at
provincial and local authority levels as well as "privatised"
taxes. An old process, which seems to have gathered momentum in
recent years, is one where certain taxes are "privatised". The much
criticised tolls are a good example of where the state used to
develop and maintain infrastructure funded from "normal" taxes, but
which are now increasingly funded by levies without a corresponding
reduction in existing taxes - essentially "privatising" some taxes.
Estimating the magnitude of these privatised taxes will depend on
one's definitions, but may be substantial.Further , what we pay is
not what we get. In recent years the focus of state expenditure
shifted, for understandable reasons, more to social expenditure.
Put differently, those who actually pay the most taxes are not
those who receive most of the benefits from state expenditure. From
this perspective, the actual tax burden on those who pay the most
taxes also increased, because they have been getting progressively
less when these taxes are redistributed by way of state
expenditure.Moreover, at times the state runs a substantial fiscal
deficit. Running a fiscal deficit is simply a postponement of taxes
to some date in the future. For that reason, state expenditure to
GDP, rather than state revenue, should be the correct measure of
the tax burden. State expenditure to GDP increased from a low of
25,8% in 2000 and is expected to exceed 30% perhaps as soon as this
year. This is clear proof of an increasing tax burden.But how does
SA compare to the rest of the world? In fact, most of our taxes, in
terms of tax rates and revenue to GDP, compare quite favourably
with most other countries. Personal income tax (PIT) at 40%,
compares well with many other countries. In Denmark a PIT rate of
59% is applicable but in Russia only 13% is paid. Similarly, with
corporate tax rates, our rate of 30,2% can be compared with Japan's
41% and Ireland's 13%. Our indirect taxes present a similar
picture. In SA VAT is 14%, in Denmark it is 25% and in Japan it is
5%.On a revenue to GDP basis, the comparison is equally mixed. The
tax burden in most "rich" countries is about 40% -50% with Denmark
the front runner at 48,3%. "Poorer" countries' burdens are,
however, significantly lower: on average about 20%- 30%, with China
burdened by only 9,4%.Clearly, and depending on your comparison,
our tax burden is perhaps not excessive but it is certainly not
low. Compared to emerging economies we do appear to pay more than
most, but we pay less than developed economies. Our tax rates in
comparison are also a mixed bag with, in general, more in common
with the rich world.The redistributive effect of the fiscus in SA
is probably significantly stronger than in most economies and is
probably becoming more so.What is clear, however, is that our tax
burden has increased significantly in recent years - a trend which
is likely to [email protected] Roodt is chief
economist of the Efficient Group.February 24 2011, 00:00
inShare Kindle Clip this articleHAS the tax burden on the South
African economy actually increased over time, or does it only feel
as if it has? Measuring and comparing SA's tax burden can, like
most things economists do, be made unnecessarily complicated. It
is, however, possible to get a fair idea on our changing tax burden
without crossing all the T's.Relative to gross domestic product
(GDP), state revenue (as measured by the National Revenue Fund)
increased from 23,7% in 2000 to about 25% in 2011. During times of
economic distress, such as during 2001 and 2010, this ratio fell to
22,7% and 23,7% respectively, mostly due to lower corporate tax
receipts related to a slowdown in economic activities - not to
lower taxes. This trend is expected to increase to 27% during the
course of next year. From this simple ratio it is clear that the
underlying trend in the tax burden has increased quite
substantially.Keep in mind that the ratio mentioned above excludes
changes to taxes at provincial and local authority levels as well
as "privatised" taxes. An old process, which seems to have gathered
momentum in recent years, is one where certain taxes are
"privatised". The much criticised tolls are a good example of where
the state used to develop and maintain infrastructure funded from
"normal" taxes, but which are now increasingly funded by levies
without a corresponding reduction in existing taxes - essentially
"privatising" some taxes. Estimating the magnitude of these
privatised taxes will depend on one's definitions, but may be
substantial.Further , what we pay is not what we get. In recent
years the focus of state expenditure shifted, for understandable
reasons, more to social expenditure. Put differently, those who
actually pay the most taxes are not those who receive most of the
benefits from state expenditure. From this perspective, the actual
tax burden on those who pay the most taxes also increased, because
they have been getting progressively less when these taxes are
redistributed by way of state expenditure.Moreover, at times the
state runs a substantial fiscal deficit. Running a fiscal deficit
is simply a postponement of taxes to some date in the future. For
that reason, state expenditure to GDP, rather than state revenue,
should be the correct measure of the tax burden. State expenditure
to GDP increased from a low of 25,8% in 2000 and is expected to
exceed 30% perhaps as soon as this year. This is clear proof of an
increasing tax burden.But how does SA compare to the rest of the
world? In fact, most of our taxes, in terms of tax rates and
revenue to GDP, compare quite favourably with most other countries.
Personal income tax (PIT) at 40%, compares well with many other
countries. In Denmark a PIT rate of 59% is applicable but in Russia
only 13% is paid. Similarly, with corporate tax rates, our rate of
30,2% can be compared with Japan's 41% and Ireland's 13%. Our
indirect taxes present a similar picture. In SA VAT is 14%, in
Denmark it is 25% and in Japan it is 5%.On a revenue to GDP basis,
the comparison is equally mixed. The tax burden in most "rich"
countries is about 40% -50% with Denmark the front runner at 48,3%.
"Poorer" countries' burdens are, however, significantly lower: on
average about 20%- 30%, with China burdened by only 9,4%.Clearly,
and depending on your comparison, our tax burden is perhaps not
excessive but it is certainly not low. Compared to emerging
economies we do appear to pay more than most, but we pay less than
developed economies. Our tax rates in comparison are also a mixed
bag with, in general, more in common with the rich world.The
redistributive effect of the fiscus in SA is probably significantly
stronger than in most economies and is probably becoming more
so.What is clear, however, is that our tax burden has increased
significantly in recent years - a trend which is likely to
continue.
