A recent article in the WALL STREET JOURNAL appears to endorse the idea that those who work for nonprofits, particularly libertarian advocacy organizations, earn less than those who “sell out” and work for “corporate America.” In “The Tragic Irony of Beltway Libertarianism” (May 21, 2008) Thomas Frank maintains that individuals can either work for an ideologically compatible, but low-paying, nonprofit, or “forsake, say, the Cato Institute and instead help ExxonMobil pile up the pelf?”.

Frank appears to be making the claim that what might (or might not) be true of a sector of the economy (e.g. nonprofit organizations pay less than corporations) is also true for each employee within it. He also points out that, from time to time, individuals leave the nonprofit sector to earn a larger paycheck in the private sector. While true, this implies nothing about the relative pay in either sector, especially considering the numerous counter-examples of employees who leave a private sector job for a higher-paying position at a nonprofit.

All employees have preferences about the type of employer they will work for, where they wish to to live, length of commute, willingness to travel, and openness to relocation. Exercising any of these preferences potentially impacts income by reducing the number of acceptable employers. An engineer, for example, who prefers to design automobiles, will likely earn less than an engineer who has no preference and is free to take whatever job pays the most. Does this imply that automobile engineers earn less than non-automotive engineers? No. It implies only that those who have few, or no, work preferences have more positions to choose from and sacrifice nothing by taking the most lucrative job.

Generalizations about what “someone” might make at a nonprofit compared to what they might make in the private sector are meaningless. Nonprofits, like any employer, require workers with certain skills and abilities; they pay whatever it takes to get them (or get by without employees). Characteristics such as leadership ability, self-motivation, and critical thinking skills are sought by these organizations, while corporations often seek just the opposite in their employees. A self-motivated leader with critical thinking skills might very well earn much more working for a nonprofit than working in the private sector.

Over time, the likely result of sorting employees in the marketplace according to the skills required by employers is that each worker ends up in the field that most highly values that particular worker’s innate skills, and each worker has maximized income, within the confines of their personal preferences.

Another consideration is that, for the most part, nonprofits of the libertarian type Mr. Frank discusses, are tiny compared with the average business. The Cato Institute—with annual revenue of less than $25 million—is the “ExxonMobil” of the libertarian movement; by comparison, ExxonMobil’s annual revenue exceeds $400 Billion.

There are many types of skills and employee characteristics that may be more highly compensated in one sector of the economy or another, but the private sector, since it is much larger and complex than the nonprofit sector, simply has more different types of jobs and, therefore, more opportunities for high income. But it is a mistake to average out the incomes from each sector, compare the average, and then conclude that each individual employee earns less in one sector than another. It’s entirely possible for the nonprofit sector to have lower average wages than the private sector, yet each employee in the nonprofit sector is earning more than if they worked for “corporate America.”

About the only thing one can say with certainty is that individuals who are adept at a particular type of work that is unique--or nearly so--to either the nonprofit or private sector will maximize earnings only in the sector that employs those type of workers. Successful fundraisers and development directors who generate revenue for free market advocacy groups are not likely to find a higher paying position in the private sector, since there are no fundraisers employed in that sector. Arbitrage brokers who make a good living in the private sector would be hard pressed to find work as an arbitrage broker in the nonprofit sector because 501(c)3 organizations do not  do arbitrage.