## Tuesday, September 24, 2013

### This blog post cost \$0

Based on data collected by Ritchie King, Ben Walsh tries to calculate the opportunity cost of the cronut and iPhone lines. Ben estimates the amount of time spent in the line, converts a \$80,326 median/average (huh? go read the original article!) income in the area to \$40.16 an hour, and performs some multiplication. He arrives at an opportunity cost of \$95.37 for the cronut line and \$359.65 for the iPhone 5s line.

The first problem with this calculation is that most people don’t have a marginal wage: they won’t be paid any more if they work an extra hour between 5am and 9am. Or maybe they do—perhaps through the mechanism of facetime with the boss leading to raises in the future—but the marginal cost of taking a very early morning off once a year is not very high even for that group of workers.

Some of the people waiting in the cronut or iPhone 5s lines may be unemployed or underemployed. If cronuts and iPhones existed in the 1990s when there was full employment in the United States, you could perhaps have argued that everyone in line could have worked an extra hour, and that’s the opportunity cost of waiting in line.

Even workers who are paid by the hour do not always have a marginal wage because the work schedule is set by the employer in advance. If you happen to work during cronut line hours and plan in advance, you might be able to get time off during to stand in line, and the lost wages would be an opportunity cost. But I would guess that only a small fraction of cronutters fall into this category.

I decided to use the Current Population Survey (CPS) data to see exactly how this breaks down in the New York area. There are 1,642 employed people (unweighted) in the sample for the New York–Northern New Jersey–Long Island metropolitan area; the unemployment rate in the city is 8.3%.

Of the employed people, 43% are paid by the hour, and 57% are not paid by the hour. For those who are paid by the hour, the average hourly wage is only \$10.59, a lot less than the \$40.16 Ben assumes. The annual wage income of those paid by the hour is \$34,798, while it is \$63,007 for those who are not paid by the hour. The overall average is \$50,775.

Those who are paid by the hour work an average of 34.4 hours a week, while those who are not paid by the hour work 40.4 hours.

All this means that if you assume everyone in line is actually paid by the hour and the population of line standers reflects the general population of workers in the New York metro area, the opportunity cost is less than Ben has calculated.

I am only counting wages here: some income is investment income, which is typically not “earned” at 5am. Even if you are a hedge fund manager and have a ton of carried interest that should be counted as wage income, taking an hour off before the market opens on a day of your choice probably won’t affect it too much.

Of course the opportunity cost of the cronut line may not be zero, but I think most of the cost is non-economic.

What if I told you that you had to get up at 5am, on a morning of your choice, and stand in line for 3 hours in SoHo. How much would you pay to avoid that? I probably wouldn’t pay more than \$20, so that’s my opportunity cost.

Alternatively, we could assume that you have to go to bed 3 hours earlier the night before. If you were forced to do that on an evening of your choice this summer, how much would you pay to avoid that? For me, personally, the standing in line for 3 hours part is much worse than the lack of sleep. If you gave me a chair, or even better, a motorized wheelchair, my opportunity cost would fall a lot.

Whatever that figure is (should we commission a survey?), averaged over all the line standers, forms the bulk of the opportunity cost of the cronut and iPhone lines.

One thing that could mess up my argument, especially as applied to the iPhone line, is if many of the standers are self-employed consultants who are not only paid by the hour, but who could actually be working and earning marginal income at 5am.

Disclosure: I own Apple stock. I do not own any Dominique Ansel Bakery or Ben Walsh stock. Please send cronut donations care of Noah. Also, the underlined word was added a few minutes after I first posted this.

Update: Ben reminds me that he did partially address the concerns about marginal wage. Consider this post an expansion on his.

1. This comment has been removed by the author.

2. Joan Robinson noted this:

"There is the problem of the relative levels of different types of earned income. Here we have the famous marginal productivity theory... The real wage of each type of labour is supposed to measure its marginal product to society. The salary of a professor of economics measures his contribution to society and the wage of a garbage collector measures his contribution. Of course this is a very comforting doctrine for professors of economics but I fear that once more the argument is circular. There is not any measure of marginal products except the wages themselves. In short, we have not got a theory of distribution. We have nothing to say on the subject which above all others occupies the minds of the people whom economics is supposed to enlighten."

http://www.economics-antitextbook.com/2011/11/joan-robinson-on-marginal-productivity.html

3. Anonymous6:27 PM

"There are 1,642 employed people (unweighted) in the sample for the New York–Northern New Jersey–Long Island metropolitan area"

Think you may have left a multiplier on the floor somewhere....

1. Anonymous8:11 PM

CPS doesn’t survey everyone, so I really do only have 1,642 people in my dataset. I included the number because once you start asking very narrow questions with CPS, you get quite small sample sizes.

I also forgot to say that I restricted to workers aged 18 and above.

4. Of course the opportunity cost of the cronut line may not be zero, but I think most of the cost is non-economic.

An entire entry on the opportunity cost concept? On Noah's blog? Yup, only possible because somebody else wrote it.

What's the point of the opportunity cost concept? Sure, you can't have your cake and eat it too...therefore...? Therefore what?

5. Rothosen10:00 PM

Wouldn't it be better to calculate the amount that could be earned panhandling the line instead of standing in it?

6. I've thought of this kind of thing before.

The key thing, I think, is to be sure to not ignore some of the benefits and costs, and to keep in mind declining marginal utility.

Suppose I wait in line for 1 hour to get a sale price \$10 lower. An analysis that doesn't take into account the above would say this is inefficient. I could work for that hour and make a lot more than \$10 after-tax (even salaried people can work more and improve long run performance, increasing the odds of promotion, decreasing the odds of layoff, etc.).

But while working an extra hour might make me \$40/hour versus \$10/hour waiting in line, I enjoy waiting in line more than working yet another hour after I've already worked 60 of them and I'm getting really tired and stressed of it. The \$10/hour is a lower wage, but it's more enjoyable to de-stress, play with my phone, read a book, chat, contemplate, etc. So, it's the higher total net marginal utility deal when you take all of that into account.

The same thing goes for things like mowing your own lawn, doing cooking and housework, or working on your car.

1. Anonymous10:46 AM

I think it’s to relevant to keep in mind that we are discussing a marginal opportunity cost. Your long run benefit from working one extra hour on any given day is quite low. If you waited on line for an extra hour for \$10 every time you had the opportunity to do so, those hours would certainly add up over time and decrease your long run performance.

Similarly, you don’t want to get up at 5am every morning to wait for cronuts, but doing it once probably won’t hurt.

7. Anonymous5:03 PM

I still think this is a reasonable, ballpark calculation, within a factor of +/- 10-fold, and that this is helpful for thinking of a very real problem: deadweight loss due to waiting!

Supermarket lines, coffee lines, congested traffic, slow computers, delayed buses, time spent on hold, all these things cause huge deadweight losses. Even if you only ballpark them to within some order of magnitude, you have to admit that something inefficient is going on and that there's scope for improvement.

Time is people's lives.

1. I think that you, more than anybody else who has replied, would appreciate this recent blog entry of mine...Market Success vs Government Success.