7/19/2012

The Economics of Nannies

Little wonder that female graduates from Yale and even Harvard-MBAs drop out so often from the labor market rather than pursue their own around-the-clock career. On the other hand, this article ultimately shows why one shouldn't rely on NPR or the NY Times for economic discussions.
. . . When Muneton started working through Pavillion in 2002, however, she increased her salary to $85,000 a year. As she gathered sterling recommendations, she began increasing her pay. Eventually she worked for some of the country’s wealthiest people, whom she accompanied on private jets to many of the world’s most exclusive resorts. Today, she says, “there are no more poor people in my family.” Muneton bought a nice house for her mother, a condo for her sister and a taxi cab each for two of her brothers. She also owns a beach house in Brazil, a penthouse in Miami and two properties (a six-unit building and a duplex) in Los Angeles.

How does a nanny earn more than the average pediatrician? The simple answer is hard work — plus a strange seller’s market that follows a couple of quirky economic principles. A typical high-priced nanny effectively signs her (and they are almost always women) life over to the family she works for. According to Cliff Greenhouse, Pavillion’s president, that kind of commitment is essentially built into the price. Many clients are paying for the privilege of not having to worry about their child’s care, which means never worrying if their nanny has plans. Which, of course, she can’t, pretty much ever. . . .

. . . According to Pavillion’s vice president, Seth Norman Greenberg, a nanny increases her market value if she speaks fluent French (or, increasingly, Mandarin); can cook a four-course meal (and, occasionally, macrobiotic dishes); and ride, wash and groom a horse. . . .

And then there’s social climbing. “A lot of families, especially new money, are really concerned about their children getting close to other very affluent children,” Greenhouse says. “How do they do that? They find a superstar nanny who already has lots of contacts, lots of other nanny friends who work with other high profile families.” There are the intangibles too. “I’m working with a phenomenal Caribbean nanny right now,” Greenhouse says. “She is drop-dead beautiful. Her presentation is such that you’re proud to have her by your children’s side at the most high-profile events.” . . .

Some of the economics here is pretty lame. Pavillion has a reputation that helps people sort out who makes the best nannies. If they provide inaccurate information, wealthy people will tell others not to trust them. Those wealthy people will also not go back Pavillion when their first suggestion doesn't work out.
. . . But it’s hard not to wonder if the nannies who make twice as much an hour as the ones we’re considering are also twice as good. Nannies can be evaluated in the same way as what economists call “experience goods” — like wine, whose value can only be determined after experiencing it. When it comes to experience goods, price can be useful to reject anything below a certain minimum. After all, a $3 bottle of wine or a $5-an-hour nanny are pretty sketchy.

But price is useless — or worse, misleading — in differentiating among the adequate. . . . They also bear resemblance to “credence goods,” an economic term for something — whether a jar of vitamins or an auto tuneup — whose true value can never quite be determined. You’re more likely to overpay for a credence good in the hope that a higher cost increases the likelihood of a benefit. . . .

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