Earning less, rationally

Monthly Labor Review, Oct, 2004

Workers sometimes change employers to get higher wages. True enough, but there are also cases where workers earn less in new jobs. Some of these cases involve workers who involuntarily left their old job and only take a lower-paying job after being unable to find anything at their old wage level. But what about those cases involving workers who voluntarily leave higher-paying jobs for lower-paying ones?

One idea is that workers accept lower wages in a new job if it is an entry-level position in a career that will eventually allow them to earn more than they would ever earn in their previous occupation. For example, a teacher might leave teaching and work as an accountant, even if that meant earning less in the new occupation for the first few years.

In Economic Commentary (published by the Federal Reserve Bank of Cleveland), Peter Rupert puts forth another hypothesis to explain why workers trade higher-paying jobs for lower-paying ones. "It's not always about the money," is his conclusion.

Wages are only part of a job's "value" for a worker. Besides wages, a worker also obtains "amenities" from a job: intangible benefits such as the enjoyment of a good workplace environment, pleasant working conditions, a certain cachet, or some other je ne sais quoi.

Employers offer various combinations of wages and amenities. In doing so, they find that it's possible to trade off one for the other. In other words, it's not necessary to offer both high wages and all the amenities. This trading off between wages and amenities is called "compensating differentials."

Workers, continually learning about the wages and amenities of various jobs, move from one job to another. Their goal is to maximize both the wages and the amenities they accrue over their working lives. A worker's ideal job would be one with high wages and the worker's preferred amenities. But such a job is hard to find. Thus, at one point in their lives workers might give up amenities in order to earn higher wages. At some other time, they might do the opposite; the accountant becomes a teacher.

Thinking about a job's value in terms of both wages and amenities leads to the observation that income alone can be a misleading measure of things such as the quality of life or well-being on the job. Whether comparing individuals who live across town or across oceans, job characteristics other than wages should also be considered.