Monday, 24 July 2017

Reason to be wary if a job in Taumarunui offers an Auckland salary

The New Zealand Herald reported last week:
If you fancy getting away from the rat-race and settling in small-town New Zealand, the perfect role just came up.
Forgotten World Adventures are advertising for a general manager to be based in Taumarunui while receiving an "Auckland salary" - over $150,000 for the "right" candidate...
The advertisement says candidates don't need tourism experience but will "need to be a true leader".
"We are looking for someone who is excited about doubling our revenue over the next three years, passionate about securing our position as a 'bucket list' experience for our target market, and focused on developing our reputation as an industry leader," the advertisement reads.
If you're wondering why a business in Taumarunui is offering an 'Auckland salary', you're right to wonder. That should be a great big red flag. It screams out "compensating differentials!".

Economists recognise that wages may differ for the same job in different firms or locations. Consider the same job in two different locations. If the job in the first location has attractive non-monetary characteristics (e.g. it is in an area that has high amenity value, where people like to live) then more people will be willing to do that job. This leads the supply of labour to be higher, which leads to lower equilibrium wages. In contrast, if the job in the second area has negative non-monetary characteristics (e.g. it is in an area with lower amenity value, where fewer people like to live) then fewer people will be willing to do that job. This leads the supply of labour to be lower, which leads to higher equilibrium wages. The difference in wages between the attractive job that lots of people want to do and the dangerous job that fewer people want to do is called a compensating differential.

So, coming back to the Taumarunui job with an Auckland salary, you really have to ask yourself what is so bad about the job that it requires a high salary to attract someone to work there? Perhaps the business is struggling (but nonetheless trying to double their revenue over the next three years)? Or maybe the owners or co-workers aren't easy to get along with? Or, maybe living in Taumarunui is truly awful? They're almost certainly compensating for some undesirable characteristic of the job.

Whatever it is, I'd be wary of applying. Is there a prospective employee equivalent to caveat emptor?

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  1. Isn't posting it as 'Auckland salary' just marketing. It's great that a small town business is able to offer such a large pay package. This would attract high quality candidates. If it works out well maybe other small town businesses would try the same.

    1. A large pay package will also attract low quality candidates. Everyone wants a large pay package.

      The only way it would work in the favour of the business is if it was an efficiency wage, i.e. if the higher salary attracts workers who will work harder. But that extra effort must be observable to the business, and increase the business's profits. Efficiency wages work better for manufacturing (and to a lesser extent service) workers, but I doubt you can make the case of an efficiency wage for a GM, because the link between GM effort and profits is so weak.