As an economic educator, I feel sorry for the professors of other disciplines because they don’t get to teach economics. While the spaghetti curves which dominate economic education are usually not the stuff of thrills, economics is really a discipline about how to find, and leverage, the rules of everyday life. It’s amazing how often our ideas make you rethink the world, and how useful that rethinking can be.
Students rightfully yearn for something practical, concepts they can internalize and apply to their lives. Economics has no shortage of such salient ideas; here are three ideas that can help anyone get the most out of life.
1. Compensating Differentials
The nature of work is one critical reason why some jobs pay more than others. Low-stress or enjoyable work won’t pay much because employers don’t have to pay a lot to get a good applicant. Stressful or dangerous work will be lucrative because employers have to offer a high salary to attract applicants.
Thus compensating differentials: differences in working conditions are offset by differences in wages. Holding the difficulty of getting the job constant (like required education), compensating differentials imply a sobering trade-off: there are no perfect jobs for everyone, because everyone would want that job and the salary would fall, and the job wouldn’t be so great anymore.
It’s important to remember that compensating differentials isn’t based on what one person prefers, but what most people prefer. It’s about market pressure and those forces can push or pull salary in myriad ways. The level of independence, sense of fulfillment, flexibility of hours, stress, expected availability, emotional toil, physical danger, job security, and opportunities for advancement all impact salary.
Lesson: Don’t just build your career based on what you love; build it based on how you are unusual. With so many factors on the table, it’s easy to find a dimension or two where you’re not like most people, and you can leverage that unusualness to your advantage.
It takes a lot of soul searching to figure out what you value and how you are not like most people. I’m fortunate that I learned in college how unusually strong my preference for independence is, and how unusually weak my preference for the “finer things” is. Relatively low-paying academia, with its tons of flexibility, is a great fit for me.
Lean into your uncommon preferences. Avoid “good feeling” work unless it seriously stirs your soul because you will be paid as if your soul is stirred daily. Understand that working on the most exciting projects means you’ll likely do a lot of drudgery because there are plenty of people who love the mere idea of being involved in the excitement. Even if you only sort-of like computer science, you should seriously consider entering that field because you will be paid as if you hate it.
2. Opportunity Cost
Opportunity cost is the forgone benefit of any choice. Economics is about making good choices, and getting something amazing means that you have to give up something else great. All costs are really opportunity costs because any money or time or effort spent could’ve been used on something else.
Graduate school illustrates the idea well. Students who graduate college during a tight labor market can secure a good salary and valuable experience-building opportunities fresh out of college. All of this means that the opportunity cost of going to grad school is high—you give so much—that graduate school enrollment plummets during economic booms. But when the job market is poor, the opportunity cost of graduate school is low, and schools are flooded with applicants.
Lesson: If your life plans include an advanced degree, apply to graduate school when the economy is strong. You’ll face far less competition and you will be able to attend a better institution than you otherwise could (and when it comes to graduate school, the one you attend matters a lot).
Yes, you’ll give up a few years of experience and salary, but if you plan on going to graduate school anyway, the real cost is the additional value the economic boom provided. Best make the investment when the potential payoff is the highest.
3. Comparative Advantage
When determining who should do a particular task, most people’s gut reaction is to identify who can do it best, but economists know to steer clear of such facile reasoning. Every decision has an opportunity cost, and anyone who can do one amazing thing can usually do other amazing things, too. Comparative advantage considers not just what’s made, but also what’s not made.
A fashion designer might make excellent clothes, but time spent double-stitching a pair of pants can’t be used to create new looks. Even though she’s best at sewing, she doesn’t have a comparative advantage in sewing because creating new looks is so much more valuable. An intern might struggle to get the thread through the needle, but they are too unskilled to do much of anything else. Their opportunity cost is low, so they are the ones with a comparative advantage in sewing.
Lesson: In early-career jobs, you will have the comparative advantage in grunt work—that’s why you were hired. Recognize that. Embrace that. If you’re struggling with something that you know your boss could handle twice as fast, you should still try to figure it out on your own. It’s far more important to save your boss an hour than to save you two (or five or ten). Your boss gives up handling critical decisions. You give up filing.
The Bottom Line: Life Is About Trade-offs
“The study of mankind in the ordinary business of life” is how late-nineteenth century economist Alfred Marshall defined his discipline. Although Marshall is perhaps best known for creating our foundational supply and demand diagram, he understood diagrams were just tools to illuminate our fundamental insights. Economics is really the discipline of everyday life.
Life is about trade-offs, and economics takes that constraint to heart better than any other social science. Anything gained comes at a cost—it is the throughline of each of these lessons.
Embracing that reality is the only way to get the most out of life.