This post originally appeared on The Finance Buff. It has also been cited in the Carnival of Personal Finance #204, hosted by Earn What You Spend.
Adults in the U.S. spend an average of almost 4 hours per day on home production (unpaid housework and errands). Every so often I hear someone justify the outsourcing of such work (i.e., the hiring of domestic assistance) with an economic-sounding argument. The individual says something like, “Since my wage rate is higher than the wage I pay my housekeeper [or landscaper or whomever] it is cost-effective.” The speaker is arguing that his time is worth too much to be spent on chores. More concretely, suppose for example he makes $20/hour (after taxes) and he can hire help for, say, $10/hour. Therefore, for every hour he outsources and works, he nets $10/hour.
This argument could be valid but isn’t necessarily so for two reasons. First of all, it is important to identify what one really does with the time made available by outsourcing home production. If it is used for leisure then one is not making money by outsourcing, one is buying leisure time. There’s nothing wrong with buying leisure but you can’t justify it financially. The wage rate argument above doesn’t hold unless you really use the gained time to work.
If you’re paid a fixed salary and not paid hourly at your main job you cannot increase your income by working more hours at that job. To earn more you’d have to take on a second job. Outsourcing home production to work 50 hours per week in a salaried 40 hour per week job is not economically advantageous, unless it is those 10 additional hours that keep you from being fired or earn you a bonus or raise.
The second problem with the wage-differential argument is that it ignores transaction costs. When you hire an individual to work an hour it costs you more than the wage you pay for that hour. It costs you the time it took to find that individual, to instruct him, to supervise him, and to prepare the work site for him. It takes time to straighten the house so the housekeeper can clean it. It takes time to keep an eye on the landscaper so he doesn’t mow down your rose bushes. Sometimes it is a lot of trouble to hire someone. Not only can it be cheaper to do the work yourself but it can be less stressful because it saves all those transaction costs, provided you have the time and skills to do it.
Similarly, to work an extra hour doesn’t net you your wage rate. You have to factor in the cost of finding a second job (if needed), of transportation to and from that job, and other time spent preparing to go to or recovering from work.
All these transaction costs eat away at the difference between your wage and that of your help. The net gain may be very small. That is not to say outsourcing home production cannot be economically advantageous. It absolutely can be. But it isn’t as advantageous as one might naively think. And in the outsource-for-leisure exchange it is not financially advantageous at all. But it may make you happy, which is, of course, priceless.