Selling holidays: A more detailed discussion
In my previous post on the issue I said that the idea of making the 4th week of holiday’s tradable sounded like a good idea to me. In the comments I was forced to discuss this issue in detail – and as a result, I aim to clarify why I think making the 4th week tradable is an improvement on not having a tradable 4th week.
Fundamentally, I believe that the argument for the 4 weeks of holiday’s is:
- It is costly to negotiate holiday’s on an individual basis,
- Firm’s prefer labour to be “available” during a given period of time,
- As a result, firms set up general contracts mainly, and these contracts involve a lower level of holiday’s than the general employee would like.
- “Society” more heavily weights the welfare of the employees,
- Therefore, the level of holiday’s is too low.
Now, I am NOT saying I agree with this argument – it is just the justification that I see for the policy in the first place. Taking this as given, the government has set it up so employees get 4 weeks off.
What does the voluntary exchange of a week of holiday do in this case? Well all contracts have “4 weeks off” in them. If an employee is willing to exchange this week for some cash they can strike a deal with the employer – who is likely to be willing to given that the value the availability of workers. In this case, the ability to trade the week off benefits both the employer and the employee at an individual level – and the welfare of other employers and employees is unchanged.
As a result, this must be a pareto improvement. I am happy for the government to do things that don’t leave anyone worse off and make some people better off – that is why I appreciate this policy.
Are you concerned that employees may be pressured into selling off their week by employers? After all, you may be paid for a 37.5hr working week, but I doubt working only 37.5hrs would do your career prospects any good. Do you think there may arise an expectation that you will work that fourth week of leave?
Particularly consider the pressure if you are to be compared to the dedicated employees in your firm who’ve just been looking for a way to work more hours. Might there not be costs to your future job prospects of taking that fourth week of annual leave? Costs that were not previously present?
Hi rauparaha,
Thanks for trying to put together some sort of implicit model to discuss this.
Here I think we need to look at the term pressure more closely. “Pressure” merely implies to me that the policy won’t benefit the employee in net terms – but will benefit the employer. The employee is “pressured” by a bad bargaining position. However, we need to actually make a model of how the employee will end up worse off before we can say trade is not optimal.
“Particularly consider the pressure if you are to be compared to the dedicated employees in your firm who’ve just been looking for a way to work more hours”
So an interpersonal externality stemming from there being different labour types influencing each others bargaining power. I can buy that – but I’m not convinced that this is a big enough issue when comparing 3 weeks of leave to 4 weeks of leave.
Ultimately, you need to come up with a convincing way why someone who works hard negatively influences your “implicit pay” – I am just not really sold on the idea, and even if I was it does not ensure that aggregate welfare would fall.
Also I would note that not introducing the policy on these grounds would be equivalent to legislating that we value lazy workers more than hard workers (who would get a net benefit) – this seems a little bit funny to me.
@Matt Nolan
Hmmm, I hadn’t really thought about it much. I just felt that there was another side to this that hasn’t really been presented.
I look at pressure as an increase in the employer’s bargaining power. I think this policy benefits employers and hard-working employees, as you suggest. It disadvantages those who don’t want to work such long hours by reducing the statutory protection of their four weeks holiday.
You comment that its ridiculous to implement policies that favour those who don’t want to work as hard, but I’m not so sure. First, we don’t live in a pure meritocracy and most people don’t think it should be. Simply look at the way we love to bring overachievers down a notch to see that.
Secondly, I can see a prisoner’s dilemma here. If we all work fewer hours we may be happier (that’s an explicit assumption). But if we are the only one working longer hours then we will be the one to get the promotions and the bonuses. So employees devolve into a pareto inferior (for them) equilibrium of working longer hours which only employers and those who love working really hard benefit from. The statutory protection of our four weeks holiday may be a way to enforce the pareto superior equilibrium. Presuming that we favour employee surplus over producer profits.
@rauparaha
“Hmmm, I hadn’t really thought about it much. I just felt that there was another side to this that hasn’t really been presented.”
There are multiple other sides – but there is only so much I can right on 🙂
“I look at pressure as an increase in the employer’s bargaining power. I think this policy benefits employers and hard-working employees, as you suggest. It disadvantages those who don’t want to work such long hours by reducing the statutory protection of their four weeks holiday.”
I am not so sure if it is an “increase in bargaining power” persee. Effectively the bargaining power is the same in both the 4 week and tradable 4th week cases – it is just that there are more margins along which the employees reservation wage can be reached. Less holiday’s should, CP, lead to higher wages.
“You comment that its ridiculous to implement policies that favour those who don’t want to work as hard, but I’m not so sure. First, we don’t live in a pure meritocracy and most people don’t think it should be. Simply look at the way we love to bring overachievers down a notch to see that.”
I agree in part – note that I didn’t call it ridiculous, I just said that it seems a bit funny. It doesn’t quite sound right. There is something uncomfortable about punishing people who work hard any more than we do.
“Secondly, I can see a prisoner’s dilemma here”
Completely agree – the externality makes this a game where an employee’s effort levels have a negative impact on the return of the other employee. Hence why I said I buy it as a reason above.
However, I would note in this case that we get higher effort levels, more production and a firm that is definitely better off. So even in the case with a prisoner’s dilemma I am not sure that the general equilibrium consequence is lower welfare.
This is just like the case with a cartel – they suffer from a prisoner’s dilemma. Even though the PD is suboptimal for them, it leads to greater aggregate welfare.
Actually, would it be right to say that laziness levels are strategic complements? In this case the law may have helped sustain laziness levels at a higher point than in the competitive game …
What seems to be missing from these discussions is the explicit provision that the holidays are the employee’s to trade. Kate Wilkinson:
“It has been reported the Government intends on letting employers offer their staff a cash payment to replace their fourth week of annual leave, but in reality they will not be allowed to make such an offer.”
“Our policy clearly gives employees the choice – only they can approach their boss and ask to make the trade. The employer can then say yes or no, as they will have to pay the cost of that fourth week”
In the same way that the unfair dismissal labour rules don’t necessarily mean that everyone is treated perfectly, it does seem that this policy is doing what it can to ensure that the employee maintains absolute discretion as to their holiday.
Naturally there’s a coordination issue here – having just the secretary trade off her holidays for cash and coming into work for an extra week won’t work. I can see that there could be situations where the employer says that they’ll only allow the week to be traded off (ie employees take only three weeks holiday and the business is open an extra week) if everyone agrees to it. I can foresee social pressure among employees to “get on the bandwagon”. However this is probably no greater than any pressures that may exist under a union system…
“It has been reported the Government intends on letting employers offer their staff a cash payment to replace their fourth week of annual leave, but in reality they will not be allowed to make such an offer”
That ruins the deal a little bit – the employee should be able to demand additional pay for working the extra week if they want to.
“it does seem that this policy is doing what it can to ensure that the employee maintains absolute discretion as to their holiday”
Agree with you on that point – it appears that they have made the trade-off very clear.
“I can foresee social pressure among employees to “get on the bandwagon””
In this case we are back to the interpersonal externality – which even if it did exist certainly doesn’t imply that aggregate welfare is declining if we allow the “externality” to occur.