(2) On opportunity costs for jobs and hourly wages

[This is a part of a series of entries loosely connected]

The argument that studying law involves high opportunity costs and therefore justifies high salaries does not stand scrutiny: obviously the proportionality coefficient between time invested and monetary return depends quite strongly on the subject studied. While it may be argued – wrongly, I believe – that low salaries for PhD students in history are simply a market signal that they are low in demand because they yield no relevant output, this is obviously not true for the natural sciences and engineering. These people often write PhDs, and their output is highly relevant to the wellbeing of society. Their salaries however – even though often higher than average – are often cut from a certain level on – they do not scale with the impact their work has. There is a simple reason for this: in my experience people studying these subjects are driven by a need to succeed – as most high achievers – but the reward structure is to a bigger fraction non-monetary.
It is often argued that wages are supposed to attract people to jobs nobody wants to do. The opposite is the case in lawyer case: here it is (supposedly) a job only few can do, hence labor supply is low. The engineering example shows that this is a fallacy: only very few can do the physics or engineering required for our high tech civilization. The difference lies in the motivation and what brings this motivation about.
The argument does also not work for binmen: here the wage is low and nobody wants to do the job; yet if they were to go on strike, there would be a public outcry. Their contribution to society is poorly rewarded, and here the non-monetary return that drives engineers is lacking. I will come back to this idea below.
I’d like to point out here that there are fundamental needs of each individual as well as our civilization as a whole that are indispensable but totally underpriced because they seem to be available in plentiful supply. This is a fundamental misallocation. All markets, labor markets included, are abysmally bad at pricing risk correctly. If you need an economic example, think of the oil price or the Argentinian debt default in the 90s.

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