Why Can’t I Raise My Rates? The role of scarcity

The first post in this series introduced the economic concept of elasticity as a way of understanding the limitations that freelancers face when attempting to raise the rates that they charge. Two extremes were discussed: a monopoly, where one translator dominates the market and faces no competition; and a highly competitive market, where thousands of translators compete in the same language pair, offering the same service.

I concluded by stating that language services (like most services) fall somewhere in between monopolistic and highly competitive markets. By that, what I meant is that there is neither a single translator, nor a single translation agency or technology, that dominates the market in a way such that it can charge whatever price it pleases and still have demand for its services. Likewise, there are not tens of thousands of translators out there offering the exact same translation service in the same language pair, thereby eliminating any opportunity to stand out from the crowd.

And this last point – differentiation – is really the key to thriving in the market for language services.

red dot differentiation
Stand out from the crowd

For starters, the market differs from one language pair to another, and from one type of translation to another. There are characteristics of the English-to-Spanish market that make it very different from the Chinese-to-Pashto market. By the same token, within these respective language pairs, there are differences between types of translations as well, such as legal and medical. The upshot is that it can be tricky to make a generic statement about “language services” without delving a bit deeper into the sub-markets that comprise it.

For now, though, let’s try to keep it simple.

We’ll begin by examining how prices are determined for language services. To do so, we first need to define the players on the market.

On the supply side, there are freelance translators, in-house translators, translation agencies and perhaps even machine-translation companies. They are offering translation as a service, so they make up the “supply”.

In terms of demand, there are businesses, law firms, hospitals, universities, the government, individuals, and any other entity or person that might need to have text translated from one language to another.

The combined forces of all these parties make up the language-service market. And the interaction among them – in terms of total supply and total demand – is the basis for determining rates.

Now that we know the players, we can examine one of the forces that greatly affects their behavior. That force – scarcity – plays a fundamental role in all economic analysis. The idea, of course, is that there isn’t enough of everything to go around. Or, to quote Mick Jagger: “You can’t always get what you want”.

Because of scarcity, Mick hasn’t always gotten what he wanted

At some point in your life, you’ve probably had a conversation about scarcity and the impact that it can have on prices. For instance, whenever there is an oil crisis – and petroleum becomes scarce – the price of gasoline goes up. We’ve all had to deal with that. The factor playing the key role in this situation is the relative availability of petroleum. When there is a lot of it on the market, prices go down. When the supply is restricted, prices go up. The same thing applies to language services.

But instead of oil, translations are the supply.

Thus, the first factor in determining the average rate within a given language pair depends on relative scarcity; i.e. the number of translators out there who can do the job. And we can start spiraling down the rabbit hole here by asking, who and/or what is a translator? What qualifies someone to translate professionally? Are all professional translators equal? Does machine translation count?

These are questions that I’ll address in more detail in future posts, but it’s important to keep them in mind when thinking about the economics of language services, because they hold the key to understanding the market and the role that both companies and individuals play in it.

In light of scarcity, we can make our first generalization about prices in the language-service market:

Whenever there are many qualified translators in a given language pair, the average rate on the market is going to be relatively low. Conversely, language pairs that have relatively few translators working in them will have higher rates.

Hopefully, at this point you should be saying to yourself, “I get that, but there seems to be something missing from this equation.” There is. It’s called demand.

If rates for language services were based purely on the supply of translators who are able to translate in a given language pair, then those speakers of the world’s rarest languages would be the wealthiest translators out there. From experience, though, it is clear that that isn’t true. And the reason why is because there needs to be a demand for their service. Without demand, that rare skill doesn’t have economic value[1].

I mentioned above the well-known example of scarcity with respect to oil and gasoline prices. On the demand side, an analogous example might be ticket prices to a live event. In this case, there is a given supply: the number of tickets available on a specific night. Once those tickets have been sold, the supply is gone.

If the demand for those tickets is roughly equal to the supply, then the event’s organizers have done a good job of gauging the market, and everyone will be happy. But generally, one of two things happens. Either the tickets are priced too high at the beginning, and there are tickets left over on the day of the event. Or the tickets are priced too low, they sell out immediately, and people are left scrambling to try to find a ticket on the secondary market.

This secondary market can be official or “parallel”. Either way, its role is to address the impact that demand is having on prices. If there is a lot of extra demand, then ticket prices will go up accordingly. If not, then the people trying to sell off their tickets will have to do so at a discount.

Returning to language services, businesses, law firms, hospitals, universities, the government, and individuals make up the demand for language services; and the greater their demand, the higher rates will be in a given market. This is our second generalization about prices for language services:

Whenever the demand for a given language pair is strong, the rates available on the translation market will be relatively high. When demand tapers off, prices will fall accordingly.

I need to mention a caveat here regarding these generalizations. They depend on one of economists’ favorite crutches: the Latin phrase ceteris paribus, which is employed to mean “all else being equal”. In other words, the idea of prices rising and falling with relative scarcity only makes sense if all else is held constant for a certain period of time. This assumption allows us to use this rule of thumb to understand the market’s behavior.

Putting these two sides of the market together – the supply of translators in a language pair with the demand for translations in that language pair – enables us to analyze the market and answer questions about why rates vary from one language to another, and from one type of translation to another.

In the next post, we’ll examine some of the specific factors beyond scarcity that affect both the supply and the demand for language services, and thus the prevailing market rates.


[1] The skill may still have cultural and/or societal value; but for our purposes, we’re going to stick strictly to economic value.