Swapping holidays for cash

I think this is an excellent policy.

Employees will be able to trade their fourth week of annual holidays for cash by next year, Prime Minister John Key said today.

This way, if there is some level of compensation that the employer is willing to make, and the employee is willing to accept, they can trade away the additional week of leave.  I would be very keen to trade-in a week of leave for cash most of the time – as I enjoy doing economics so much anyway 😉

Generally, I am a big fan of giving people flexibility in the labour market (both employers and employees) and this policy increases flexibility for both parties.  Excellent 🙂

  • DanT

    Matt,

    It is so endearing that you have such a quaint notion of how the labour market works. Either there are stat holidays or there are not. You might as well extend the logic and say that there are is no annual leave requirement (ie no right to annual leave ), but if you want to take leave you can negotiate it with your employer and if you are prepared to sacrafice enough wages you can take it.

    For whatever reason this approach is deemed unsatisfactory and a minimum amount of annual leave was decided upon. That is currently 4 weeks. It was decided upon because the ability of employees to negotiate for it must have been deemed to be impaired, and that a minimum of 4 weeks is considered necessary.

  • @DanT

    Quaint notion, hahhahaha.

    I recognise that we have some set rules – because the transaction cost of negotiating these matters on an individual basis would be too high. However, a FOURTH week of annual leave doesn’t really fit my conception of this.

    Furthermore, the transaction cost only appears when the employee and employer are negotiating to GET RID OF the fourth week now – so if people do do it, it must be in both parties interest

    “For whatever reason this approach is deemed unsatisfactory and a minimum amount of annual leave was decided upon”

    Hmmm, so I’m being told that adding a fourth week to annual leave was the optimal policy, and so giving people the opportunity to trade it in for cash isn’t. Poppycock my friend.

    If you give me an actual argument that illustrates what is wrong with the bargaining relationship between the employee and employer we can discuss it – but merely stating that the way policy was set up is optimal won’t get us very far …

  • moz

    I’m struggling to believe that on all other matters the relationship is so lop-sided that we need special protections for workers (minimum wage, leave, safety conditions etc), but when it comes to negotiating whether to accept $1 and keeping their job instead of a weeks leave the average 17 year old McWorker is suddenly able to negotiate as an equal with their employer.

    We don’t even have to bring in the fire-at-will provisions that can be easily used to drive conditions back to the legal minimums. Remember, these rules are not made for reasonable people negotiating in good faith, they’re made to restrain the worst.

  • @moz

    I don’t have such a negative view of employers. I spent my uni years working at the Warehouse and it was a surprising good environment.

    If the concern is that people on the minimum wage would be abused then the solution is easy – make it that people can only negotiate their week for pay if they are getting paid sufficiently above the minimum wage to start with.

  • DanT

    I’m not sure that I need to justify the status quo so much… I am not arguing about whether 4 or 3 is the right amount – I have no idea and am hardly the person to ask!

    However you seem to use a blanket argument about whether any level of holidays should be mandatory to justify reducing from 4 weeks to 3:

    “This way, if there is some level of compensation that the employer is willing to make, and the employee is willing to accept, they can trade away the additional week of leave.”

    That is clearly an argument against statutory minimum leave requirements altogether rather than whether that level should be at 4, 3, 2 or 1 weeks. Just putting the word “extra” in there doesn’t mask the underyling reasoning. If that is what you are arguing, then please confirm it and don’t confuse the issue with talk of whether the right amount of stat minimum is 4 or 3.

    If on the other hand you think that for whatever reason 3 is more reasonable than 4, please tell me why. I may not disagree!

  • DanT

    I meant “additional” rather than “extra”

  • “I’m not sure that I need to justify the status quo so much… I am not arguing about whether 4 or 3 is the right amount – I have no idea and am hardly the person to ask!”

    But you were implicitly assuming that the status quo was optimal – as a result it is a pretty important assumption to justify when trying to say that I’m wrong.

    Now, if you had framed it as an additional issue – saying that it is possible it could have been taken that way I would agree. However, any debate relies solely on the discussion of whether having the fourth week as “compulsory” leave is really optimal.

    “That is clearly an argument against statutory minimum leave requirements altogether rather than whether that level should be at 4, 3, 2 or 1 weeks. Just putting the word “extra” in there doesn’t mask the underyling reasoning. If that is what you are arguing, then please confirm it and don’t confuse the issue with talk of whether the right amount of stat minimum is 4 or 3.”

    I may believe that there is no need for statutory holidays, I may believe that two weeks is the optimal amount, I may believe 4 or 6 weeks is – so I agree, we do need to put forward a belief on when statutory leave is appropriate before we can say anything else.

    However, that doesn’t invalidate anything to do with my post. Four weeks of leave IS STILL the basis – just like before. The only difference is that if the employees and employers want to negotiate, and take on the transaction cost of doing so, they can replace one week of that pay with leave.

    I said that I though allowing people that option itself was optimal – as it implies that people willing to take on that transaction cost can improve their welfare, while people unwilling to are in the same place as they were before with previous policy.

    I don’t need to say what type of overall statutory leave policy I want to say this – I just need to discuss how allowing people to negotiate away the fourth week is optimal.

    If they were removing the week altogether, then we would be having a different discussion.

  • DanT

    I see making the 4th week exchangable for cash instead basically the same as reducing the stat minimum from 4 to 3. There has always been the ability to negotiate leave upward from the stat mimimum, presumably in exchange for a salary reduction or equivalent service. You can slice it either way, but as I see it making the fourth week negotiable makes only 3 weeks mandatory. The whole thing about whether the default is 4 and you can negotiate more cash to reduce it to 3 (as opposed to the default is 3 and you can reduce salary to make it 4) to be a non-distinction and a side show. So I disagree entirely with–

    “Four weeks of leave IS STILL the basis – just like before. The only difference is that if the employees and employers want to negotiate, and take on the transaction cost of doing so, they can replace one week of that pay with leave”

    (Transaction cost arguments are cute but not really what is going on here).

    So I take the proposal as one to reduce minimum annual leave entitlements from 4 to 3 weeks. As always employers and employees can agree on more than the minimum if they so choose – no disagreement there (and few transaction costs I would have thought). But it is trying to fudge the issue to pretend that the ability to exchange cash for leave is anything different from reducing the stat minimum.

    So I go back to what I was saying before – if you are putting forward an argument that 3 weeks stat min is better than 4, by all means tell us WHY (and I may not disagree), since you have come out and said that you “think this is an excellent policy”. I don’t mean to defend the status quo, but since you appear to think that 3 is better than 4… lets hear why!

  • @DanT

    Dan. It is because I am presuming it is the negotiation of the holiday’s that is costly. As a result, the fact that it is 4 weeks and can be negotiated down makes a HUGE difference.

    If there are no transaction costs to making a contract then I would rather have no stat leave – as the employer and employee would make up a contract that was in their mutual interest costlessly and immediately. The transaction cost is the essence of the issue.

    As you said at the start:

    “It was decided upon because the ability of employees to negotiate for it must have been deemed to be impaired”

    Indeed – it is impaired because of the transaction costs involved …

  • DanT

    So it is an argument that, as a default, 4 is correct and the right amount for most, but for some others (employers and employees) 3 is better. And for those others it should be negotiable and will be negotiated where the transaction costs of doing so are less than the joint benefits – whcih would be an optimal outcome. Is that right?

    I guess that there are two questions that arise from this:
    1 – why is 4 weeks the ‘default’ amount? Why not have 5 or 0 the default amount? Why if 4 is the default should only 1 week be negotiable? Should not all 4 weeks below the default be negotiable? If not (and it appears not to be on the table) why not?

    I wonder if the government has done any analysis whatsoever to lead them to this policy?

    2 – Exactly what does negotiating entail? I suppose that we need to see the proposed amendments before we can tell. Does it (practically) mean that standard contracts can be presented to the employee with 3 weeks leave and an extra $x ‘negotiatied’ in? Then the default would be 3. It will be interesting to see the mechanics of how this will work.

  • “would be an optimal outcome”

    Dan – I am not discussing an optimal outcome, I am discussing a pareto improvement.

    As I have said repeatedly, this policy allows people who are willing to take on the negotiation transaction cost to sell a week of leave. I view this as a pareto improvement on not being able to sell that leave – I am not saying it “is the optimal outcome”. That question is SO much harder, and so much more debatable.

  • DanT

    Matt,

    I guess that you could say that I am sceptical that there is any analysis to suggest it will be a pareto improvement when implemented (ie how it will actually operate as opposed to a first principles analysis of ‘is it a good idea’ divorced from the mechanics) – hence my desire to see the detail. Perhaps we will be lucky and the way it works in practise will be good – on the other hand, without real analysis to steer it this is a bit of a long shot.

    I am also sceptical of politicians who can claim to know what is reasonable and what is not in this area based on first principles generally. It smacks of very poor policy development. I shudder at policy on the hoof in such important areas.

  • DanT

    I guess we completely disagree here then – as I think the policy completely makes sense, and I’m willing to trust the economic tools that justify it.

    Why do you think it won’t be a pareto improvement when it allows trade that couldn’t previously occur?

  • moz

    Matt Nolan :
    @moz
    I don’t have such a negative view of employers. I spent my uni years working at the Warehouse and it was a surprising good environment.

    Matt, I specifically said it’s not about the good employers, because they will always (by definition) behave reasonably. It’s not about whether the public service will be offered the option of trading leave for extra pay, it’s about whether McWorkers are getting an effective pay cut. Or working an extra week in order to keep their jobs, you decide.

    The problem here is that National are going for three weeks leave with the option of more, rather than the current four weeks with the option of more.

    I’ve once worked for someone who let us accumulate time in leiu so it effectively became paid leave, and someone who did a similar thing but then refused to actually let anyone take the time in leiu. There was just never a suitable time… with that employer there was never a good time to let the employees have anything. I can see that guy leaving salaries unchanged but reducing the annual leave, just because he can.

  • DanT

    I have not said that it won’t. I refer to concerns around its implementation. If it is implemented such that in reality 3 is the default and the 4th week is really what is negotiated, then we reach an interesting situation. On the one hand we could just argue that this makes no difference because it is still pareto optimal (better than 4 weeks stat min).

    But then the wider context is missing! That context is around what is the default minimum and why we even have one! If we can argue that making four a default is better than 4 as a minimum, or that 3 as a default is preferrable to 4 as a minimum, then why not have zero as the default! Or 1! Or 5! Or 7! How is that judgment made here? You can’t go saying that shifting the default up or done is good without some reason for thinking that the default is bad/good. You can argue pareto optimality all you want but to be valid it has to be predicated on some assumption about the validity of the starting point. ie you characterise (I think) having some stat point (that can be negotiatied up/down) on the basis of transaction costs, but what is the cost minimising level for that stat point? If you are at that cost minimising level, it cannot be true that a move from it is efficient.

  • @moz

    Hi Moz,

    They have specifically said that the fourth week is still in law – it can just be traded away if the employer and employee are willing to.

    If we really really really believe there is an issue of market power in industries with low wage rates, then we could amend the policy to state that people earning under $X can’t do this.

  • “I refer to concerns around its implementation. If it is implemented such that in reality 3 is the default and the 4th week is really what is negotiated, then we reach an interesting situation. On the one hand we could just argue that this makes no difference because it is still pareto optimal (better than 4 weeks stat min).”

    I have already said that the situation where 3 weeks is the initial position is completely different eg

    Matt: “Dan. It is because I am presuming it is the negotiation of the holiday’s that is costly. As a result, the fact that it is 4 weeks and can be negotiated down makes a HUGE difference.”

    I have said this the whole way through – it is an essential assumption, and the fact they are doing the policy this way is why I like it.

    “But then the wider context is missing!”

    I am not discussing the wider context and trying to develop a full set of employment laws am I – I am discussing a change to one attribute and assuming CP, which is actually pretty fair in this situation.

  • I want to do the reverse – trade cash for more holidays. At least in the USA organizations are unwilling to negotiate on such things in general. They have a set policy and don’t think of such things as negotiable. Obviously some employers will under some circumstances, but in general they won’t.

  • @John Hunter

    Hi John,

    That is very true – it is difficult and expensive to negotiate additional leave from a given point. These costs are part of the reason why I think it makes some sense to legislate it. Furthermore, that is why I think this policy makes sense – as it keeps the 4 weeks there and then allows negotiations to reduce it.

    If there are any bargaining issues (or possible multiple eqm with different expectations/beliefs) then we could improve this new law by making it applicable to only people on a wage above some $X – as these people would have market power. It would be an improvement over enforced holidays.

  • moz

    When the fourth week was brought in did employers mostly adjust wages so people got 48/49ths of their previous rate to make up for the extra week off?

    Like John, I’ve had no luck in getting extra holidays at any price in Australia or New Zealand. Well, more accurately that is one major reason why I’ve been contracting for 10 years… I can take leave when I want to. Even the more rational of my “permanent” employers was willing to pay ~10% extra just to avoid me having an extra 2 weeks leave. They explicitly feared that other employees might want extra leave too.

    “permanent” because the longest I’ve stayed with any one employer is 3 years, so even a permanent position is not actually very permanent. In NZ that’s because employers seem to pride themselves on “we employ the smartest people and pay less than average”, in Australia it’s because they seem to dump employees for the most bizarre reasons (and have no qualms about hiring them back as contractors).

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  • @moz

    Hi Moz,

    I agree that wages didn’t suddenly fall – but it will have impacted on any future pay increases and on the rate people would start work on.

    It is very hard and costly to reduce someones nominal wage in many circumstances. Ultimately though, if firms are having to effectively increase employees pay in one way (with an extra holiday – and so less production) they will have to reduce it another way – there is no “free money” sitting out their.

    I completely agree that it is difficult to get additional weeks and that their is a co-ordination issue. However, I am merely comparing having 4 fixed weeks to having 4 fixed weeks and the opportunity to sell one – given that the opportunity is voluntary this is a very good idea.

    I am not trying to say what level of stat holidays are optimal, I am just saying that giving employees the opportunity to “cash out” their holiday will IMO lead to better outcomes.

  • moz

    For employers the outcome is definitely better. More freedom, lower costs. Now, if you could just demonstrate that before this change employers were excessively constrained or faced excessive labour costs.

    I still object, because the “opportunity” is more akin to choosing not to pay taxes to the IRD than choosing chocolate icecream over vanilla. Sure, it’s theoretically trivial to avoid paying the IRD anything – just move to another country. The actual cost of so doing is such that few people choose that approach, and even fewer choose to move to low-tax or no-tax jurisdictions.

    The problem is that each successful prosecution requires a worker who has nothing to lose, because this sort of complaint is another one where keeping your job afterwards is not going to work. Unfortunately the fire at will bill and other free-movement-of-labour[1] rules make it unlikely that workers will be compensated for the consequences of complaining. Can you really see a worker turning round on day 91 and saying “I’d like to renegotiate my contract because I don’t want to sell my holidays any more”… oh, but wait, that would put them back at the start of another 90 day FAW period.

    [1] the theory is that labour units[2] move easily in a free market for labour. Just ask John Key.
    [2] “mummy, when I grow up I want to be a human resource”.

  • @moz

    Hi Moz,

    Sorry I don’t really see what you are saying here.

    The new law would keep 4 weeks of leave – an employee could negotiate an individual contract with 1 week less leave and some compensation for that. It gives the individual and the employer the opportunity to negotiate.

    Now, we may have a case where the employee is no better off as they have no market power. However, the employer still has to compensate them for their time (making them no worse off) in order to remove the week. In net terms, this will only happen when it makes everyone better off (or at least no worse off).

    If we believe that the situation could be abused in some way for people with low market power – then set it up so people who get a low income are ineligible. Then it can’t be used against them (so they are no worse off) – but people on higher incomes will still be better off.

    Also, with the 90 day law it isn’t based on contract, it is based on the employee. You can’t rehire the same employee for another trial period after doing one. So I don’t think that applies as a criticism either.

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  • moz

    It gives the individual and the employer the opportunity to negotiate.

    Yes, of course. The employer says “would you prefer to have three weeks leave or no job?” and the employee says “I’d rather have six weeks leave and my current pay”. Then they try to justify that to the dole office when their boss fires them for being a smart arse.

    There’s a huge imbalance in bargaining power that you’re abstracting away. Legislating to correct that is something that John Key doesn’t seem willing to even talk about, and indications to date are that he will not pass any law that favours employees over employers.

    The idea that since you as a rich, educated person with secure employment can bargain effectively with your employer therefore so can everyone else is just wishful thinking. Most of the casual labouring type jobs I did at uni, for example, were “do what the boss says, when the boss says, take whatever pay you’re offered and don’t argue about your paycheque” type ones. And that was in the 1990’s. These days many more people are permatemps who can keep their jobs but lose their hours at the whim of their employer, so their bargaining power is perilously close to zero (there’s still a slight hassle involved in replacing them).

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