Saturday, July 10, 2010

Money Attitudes

This article brings up a lot of interesting points about how people think about money.

First, it demonstrates how little children are, by nature, vicious greedy little monkeys obsessed with social status.* 4-year-old daughter a few weeks ago stomped her feet, turned red and demanded to know why we did not own a summer house.

...most questions about salary spring from the schoolyard. "There is so much comparison going on there," he said. "Who is best looking? Who is most popular? And money just plugs right into that system. Who has the richest parents?" 

Second, it has an excellent technique for teaching children the value of money and the costs of things:

Given a particular request to return to a beloved but expensive vacation spot, David Blackburn of Montclair, N.J., stole a lesson from kindergarten class, where his son had been learning about bar charts.

The two sat down and sketched out some things the boy was familiar with, including one week's allowance ($1.25), a Lego set ($20) and sushi for the family ($60). But a night for four at the Mohonk Mountain House in New Paltz, N.Y., was so expensive that it required a few extra pieces of paper to graph it in proportion. "His eyes got big," Mr. Blackburn said. "And he asked a lot less about going to Mohonk."

More parents need to do things like this.  It shows that children can be taught about costs, if you take the time to do it right, and the rewards will be large.  I also approve of the $1.25 weekly allowance for a kindergartener.  That is about the right amount of money for them to be handling.

But what I mainly want to talk about is not something that just involves children.  It is a pervasive problem that infects way too many adults:

Indeed, the problem with disclosure [of salary] in this context is that many younger children will immediately tell someone (or everyone). And the automatic social reflex is often a flash of shame among people who hear the number and make less, Mr. Kessel noted, or arrogance among those who make more. Who truly wants to put others in either situation?

I have never understood why people have such a hang-up about salary.  This paragraph shows an attitude of judging the worth of people by how much money they make.  People who make more money feel or are made to feel inferior and those who earn more are assumed to be superior.

I say this as someone who studies money-related topics for a living: Judging the worth of anyone by how much money they make is stupid, and the reluctance to talk about how much money people make is a serious mistake.  The salary someone earns should not be seen as an integral part of someone's identity, it should be viewed as a choice that they make in life, no no more important than their choice of hobbies.

Leaving aside the fact that marketable skills are only loosely related to your worth as a human being, there are two reasons why people of identical skill might earn different salaries: the labor-leisure trade-off and compensating differentials.

The labor-leisure trade-off is a fact about how people choose to spend their finite amount of time.  They can either work to earn money or they can take time off.  In order to enjoy anything in life, you need both time and money.  Some people prefer to consume things, like world-class restaurant food, that are very expensive but take very little time out of your day.  Other people prefer to consume things, like backpacking trips through the mountains, that are rather cheap but take a lot of time.  The gourmand will choose a job that pays more and takes more time, while the adventurer will take a job that pays less but gives more time off.

The compensating differential is the fact that unpleasant jobs will pay more than pleasant jobs, even if the skills required are identical.  Suppose that a company needs two customer support people, one to take orders and the other to deal with complaints.  Dealing with irate customers is an unpleasant experience, so everyone would prefer to be the one taking orders, so the company will have to pay more to the person who deals with complaints.  (If they do not pay more, then the people who apply for the complaints job will be less skilled and competent than the ones who apply for the order-taking job.)

Note that these two factors need not be part of the job itself, but can also reflect the required training for the job.  Engineers earn more, partly because engineering students in college tend to be assigned more work than people in other majors.  People who prefer to earn more money become engineering students, while people who prefer to consume more leisure time in their college years do not.

So the fact that someone earns more money does not necessarily mean that they are more skilled.  They might have an unpleasant or dangerous job, or a job that requires a lot of time.  The people who earn less might be choosing a lifestyle of relative ease and comfort, rather than one of expensive consumer goods.

Most people understand this.  And yet, they still refuse to talk about salary.  It is the one thing about themselves that they will not share.  At the company I used to work for, people would gladly discuss all manner of private things like medical problems, family conflicts, and sexual adventures.  But they absolutely refused to say anything about their salary, despite the fact that we all had jobs requiring very different skill sets, amount of time at work, and unpleasantness to deal with.

Whenever you see a social norm like this, you should think to yourself: "What group of people are most helped and harmed by this?"  That group of people will have an incentive to perpetuate the norm.  In this case, the reluctance to talk about salaries is harmful to employees and beneficial to employers.  It means that the employer has more information about salaries than the employees do.  In any negotiation or bargaining situation, information is vital.  This social convention of refusing to talk about salaries means that employers have a massive information advantage in salary negotiations.  They know much more about what you are worth than you do, and this can often allow them to take advantage of you.

When comparing salary with your peers, there are three possibilities.  You could learn that you are making more than you are worth, less than you should be getting, or the right amount.  The odds of learning you make too much are very low, because the company simply would not have retired or retained you at a salary above the fair value.  So the only real possibilities are learning that you make too little or just enough.  It might cause some temporary pain to learn that you are underpaid, but once you have this information, you can use it to get more money, or look around for a better job.  And knowing that your salary is fair would be much better than living with uncertainty.  No matter what the situation is, employees can only win by comparing notes.

Unions are aware of this fact.  Whatever you think of them, it cannot be denied that they are quite good at extracting resources from employers for the benefit of the union workers.  Union jobs tend to be characterized by well-known pay scales, while non-union workplaces are characterized by secret salaries and individual negotiations.

It has been speculated that one reason women make less than men is that they are less aggressive in salary negotiations.  This would probably change in a hurry if they knew what everyone else was making.  From this point of view, then, the social norm of refusing to share salary information is a tool to keep women down.

*The neurotypical ones, at least.  Non-neurotypical children are vicious greedy little monkeys obsessed with something else chosen at random.

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