You 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 quantify—to put a concrete number on—the time being wasted? To say not just, “My time is valuable!” but “That’s $123 of my time down the drain!”
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. Let’s not quantify that.) Here’s 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: You’ll have to spend all of your time at the restaurant—you can’t have another job. This means giving up some earnings—whatever your salary would be at that other job. That amount? That’s the opportunity cost. When you think about whether it’s a good idea to open that restaurant, you must consider this cost, just as you consider the cost of the food.
It’s not too hard to see how this applies in your life. How much is an hour of your time worth? It’s 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: It’s whatever your salary works out to per hour. (I realize that your boss probably won’t pay you more if you work more hours. But you could always get a second job, probably at the same wage rate, so don’t overanalyze it.) Same logic if you don’t work at all: If you did get a job, what would the wage be?
You may be thinking: Don’t be ridiculous, I don’t 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. There’s 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 Stop’n’Shop as a glamorous activity and asked why we didn’t get to do this. My mother promptly explained that the other children’s parents “didn’t 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 time—more 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 you’d be paying (or unless you actually enjoy cleaning), if you’re not choosing to work in those hours, you shouldn’t be cleaning either. Ditto for laundry, yard work, snow shoveling, and on and on. You like opportunity-cost theory, eh?
Of course, this doesn’t 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 you’re 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 shouldn’t be doing it for yourself either.
Opportunity cost isn’t 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? It’s easy: hours of commuting time per month times your hourly wage (plus gas, train fare, etc). That’s how much extra you should be willing to pay to live in the same kind of house closer to work.
Applying opportunity-cost theory won’t 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. Didn’t they know my time was valuable? But consider this: Because of the way appointments like this work—because they are unpredictable in length—someone 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, it’s efficient for it to be the person with the lower opportunity cost. In other words, you.
The only inefficiency here is that you can’t outsource waiting for the doctor. Now there is a missing market.