Sunday, July 22, 2007

Vacationing for health

Continuing the conversation about vacation policy, Tim Lee writes:

No seriously. Recruiting talented employees is difficult, and getting them to be productive is harder. So employers collectively have billions of dollars riding on finding the optimal vacation policy for their firms. The armchair CEOs of the blogosphere, in contrast, just think it would be neat if people got more vacations. Who do you think is more likely to be right?


If it were really true that giving employees more vacation days would make them produce more over the course of the year, that would be a double bonus: it would make it easier to recruit employees and it would cause them to produce more stuff. Employers would be stupid not to do it.

First, are we so sure that the market is really such a well-oiled machine that we are confident that vacation policies it has come up with are optimal? Or, like everthing else, is it subject to inertia, an attitude of, "I only had 2 weeks of vacation when I made my way through the ranks, and I worked 80 hour weeks, and doggone it these young whippersnappers can get by with just 2 weeks of vacation as well." Might there be other factors contributing to these policies besides what is strictly optimal? If so, might it take a little nudge from the government to move them along?

Second, obviously it would be ridiculous to assert that a worker's absolute productivity would increase with more time off, which is why only Reed and Yglesias's strawmen made such an argument. Fortunately, that's not necessary for this to be a good policy.

The assertion is that the marginal productivity of the last week or two of a worker's time is less than her absolute productivity divided by a week or two.

If that is the case, then in order for employers to gain by offering increased vacation, they would need to lower salaries, but they would not need to lower them by the same percentage as the additional vacation days represent. They would just need to lower them enough to cover the marginal productivity, which is less.

Except for one thing -- in order to maintain the same level of productivity, employers would have to hire additional workers. And there are transactional costs to that. In essence, increasing vacation makes sense if

marginal productivity of vacation time <

reduction in salary worker will accept for additional vacation

+ transactional cost to add marginal productivity.

Which is yet another negative impact of linking health care to employment. From an employer's perspective, it is cheaper to have fewer employees working more hours than to have more employees working fewer hours, because they have to pay for the health care benefits for each additional employee.

Again, the current health care regime proves to be a drag on the economy.