Why I Cannot Outsource More

Specialization is a key to wealth, which is why I wish I could get more of it.

Self sufficiency is a luxury good for the rich and a punishing nemesis for the poor. The less you can specialize in something because there are too few others to trade with, the poorer you will be. The wealthy indulge this as a hobby. The rest of us desperately search for ways to minimize it.

Or at least we should be doing that search. Folk wisdom about the virtue of self reliance and other cultural norms that discourage outsourcing push back against what is otherwise the road to greater wealth, health, and happiness.

You may take pride in cutting your own grass, dusting your own house, doing your own taxes, and so forth, but you should always weigh that value against the true cost—your opportunity cost, which generally boils down to the value of your time.

As theoretically desirable as it is, outsourcing faces structural limitations. Corporate, salaried employees cannot easily work more at their given comparative advantage while outsourcing their disadvantaged work. This is greatly true too for hourly employees who are similarly limited or locked into a fixed quantity of work in their current positions. Moonlighting is not an option or at least not a practical one in many cases especially for salaried, high-profile positions.

The implication is that not as much outsourcing can occur as would otherwise. Consider a typical, theoretical week ahead for me. I might start out the week money rich and time poor, but this begins reversing after budgeting for a few outsourced projects or tasks. My marginal wage goes from a relatively high figure to quickly be nearly zero once I’m off the clock.

Even if I would prefer to work at my primary employment an extra 5 or 10 hours, there is no arrangement available to pay me anything additional for this time. Painting my bathroom was something I wanted to outsource to a professional being that my income exceeded his cost to me along with the benefit of his expertise. Suddenly this cost-benefit reverses once I’m down to a few hours to spare—working more earns me nothing while doing the painting myself saves the expense of the painter (minus the beforementioned expertise benefit).

Notice how everyone is worse off in this situation. My employer (hence ultimately my customers) did not get the additional benefit of my extra hours of work. I did not get the positive difference between my pay and the cost of hiring a painter. The painter did not get the extra job he would otherwise want to do.

It may seem obvious, yet this is an underappreciated problem.

And it gets weirder still. Compare two people: a 50-year-old salaried middle manager named Bob and a 22-year-old who works various gig jobs named Jim. Bob’s effective hourly take-home wage is $75 while Jim’s is only $20.

Now consider the situation where both Bob and Jim are needing weekly lawn care. Intuitively it would seem on the surface that Bob would be the one more likely to outsource to the lawn service while Jim would be more likely to do the work himself. However, let’s dig in more deeply to see how this might not be the case.

The hourly rate a lawn service will charge is $25 per hour. While Bob’s lawn is twice as extensive, the hourly rate is the same. The difference is Bob would need four hours per week from the lawn service while Jim would only require two—$100/week for Bob versus $50/week for Jim.

Alternatively Bob could do his own lawn work in six hours of his time and Jim could do his own in three hours. Despite the intuitive assumption that Bob would be the outsourcer, that is not so easy a decision for him.

Bob cannot go work extra hours at the hourly rate of $75. He is salaried after all. His relevant tradeoff is the value of his leisure. This might easily be worth the implied $16.67 per hour ($100 cost of lawn service / 6 hours — the relevant time is what Bob gives up not what it takes the lawn service). To determine if Bob’s leisure is worth this tradeoff we would have to know more about how Bob values his time. Bob might very well decide at the margin it is not.

For Jim the decision might be easier in favor of the lawn service. He can easily get an additional three hours of gig work at his rate of $20/hour yielding him $60 of which he would pay the lawn service $50. This leaves Jim with $10 left to do as he wishes. If Jim is time rich and money poor, this could easily be a good trade for him to make.

Another way of thinking about it for Jim is that the $50 lawn service charge versus his three hours foregone if he does it himself also implies a value of time of $16.67/hour. This is below his wage rate and equal to the necessary threshold for Bob. It is possible but unlikely that Jim’s leisure time is worth the same as Bob’s given what we already have assumed about the situation.

So we easily could be looking at a situation where the more highly-paid person does his own lawn work while the younger, lower-paid person does not. I can just image the onlookers shaking their heads at both: “Why doesn’t Bob just higher someone to do that work?” and “Look how lazy and entitled Jim is. He is probably playing video games while he pays people to mow his yard—AT A RATE ABOVE WHAT HE MAKES! Tsk-tsk.”

Related: David Friedman on specialization