the dichotomy of labor and leisure…


(This is a short piece written in response to an assignment to explain how an increase in wages can potentially decrease the amount a person wants to work.)

While it is perhaps difficult to conceive in the US today, the choice of increased leisure over increased money inmakes an make perfect sense and, while less common society-wide in the US than in many other developed nations, is still on ample display in the US. In a number of European countries, it is a feature of the very landscape of society.

A question that perhaps does not get enough attention today in our own country is “how much is enough?” There is a literally endless way to spend however much wealth one acquires and ample cultural prompts, in the form of pop culture TV shows and larger revealing memes such as the increasing media debate over the last year or two about whether making $250,000 annually is “rich” or just “middle class” (in a nation where the median income, among the highest in the world, is around $45,000/year). A recent Atlantic Magazine article quoted the daughter of Pete Peterson, Blackstone Group co-founder and pro-austerity activist describing the Upper West side rich of New York as follows:

I think people making $5 million to $10 million definitely don’t think they are making enough money.”

As an example, she described a conversation with a couple at a Manhattan dinner party: “They started saying, ‘If you’re going to buy all this stuff, life starts getting really expensive. If you’re going to do the NetJet thing’”—this is a service offering “fractional aircraft ownership” for those who do not wish to buy outright—“‘and if you’re going to have four houses, and you’re going to run the four houses, it’s like you start spending some money.’”

The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.”

In these contexts, it is perhaps understandable that many lose sight of choosing leisure as a sensible choice when there is so much more yet to be consumed, but since time is the only truly finite asset human beings individually have to ration all on their own, it is worth considering the balance between leisure and work in a more detatched fashion than we, as a nation, have been doing.

In the 1950s, optimistic US “futurists” like the cold-warrior Herman Kahn predicted, in his 1967 book, The Year 2000, that workers in the US would eventually enjoy 13 weeks of vacation and a four-day work week. Sadly, the actual decline in working hours ended in 1970 and has slightly reversed since that time. In Europe however, a different trend began in the 1980s which has continued to this day, in countries with widely varying stereotypes of work habits, from “decadent” Mediterranean countries such as Italy and Spain to staid, fiscally conservative Germany. In these countries, hours worked per person (a combination of labor force participation rates, hours per worker and mandated holidays) are nearly 50% less than the US and vacation weeks per year are 6 weeks greater. As late as the 1960s, Europeans worked, on average, more hours than US workers, but a confluence of forces such as government-mandated holiday time, labor unions bargaining for worker increases in the form of leisure rather than wages and some structural tax policies have all continued to move Europe towards the dream of the Futurists. 1

These diverging paradigms of work point out a significant contextual problem with the idea of viewing both leisure time AND labor time as “goods” since, unlike any typical purchased “goods,” labor and leisure are truly a dichotomy. In other words, less of one means more of the other. It is telling that standard economic texts view this trade-off from the default position of calling the choice to supply more labor as prices rise the “substitution effect.”2, 3 Implicit is the view that forgoing money income means raising the cost of leisure rather than reducing it. However subtly, this highlights the predilection of economics to view all things, including one’s irreplaceable time, through the price system. From the substitution view, leisure is an inferior good, i.e. as your income rises, you consume less of it (The standard inferior good in econ classes is a bus ride. With bus rides it is generally the case that as your income rises you use less of them due to increased ability to afford a more convenient ride). This view seems to sum up, in the aggregate, the US view of the status of the “product” that is leisure time.

Europeans could be said to view leisure more as a normal good. For these societies, leisure is a good that can be described as subject to the wealth effect (in which one consumes more of something as one’s income rises), from the point of view of labor and leisure as a dichotomy.  Since an increase in leisure (under conditions of some ordinary wage increase) can only be consumed by holding constant the product of labor, i.e. cumulative income, it is more sensibly viewed as a situation where falling prices increase purchasing power. In the same way that a fall in the price level makes the same $100 more valuable in real terms, a fall in the price of leisure (measured in time required to earn n cumulative income) makes the purchasing power of labor (again in time) more valuable. There is much to be said for this view. Research suggests that the institutionalization of leisure time in Europe, in the form of the month-long summer vacation, actually shows clear increasing returns to the value of the leisure itself for all consumers, i.e. society-wide increases in leisure consumption, such as summer vacations across Europe, have positive spillover effects, in terms of enjoyment and social cohesion, for all who partake in it.4

There are cohorts, both large and small, in the US, who do view leisure as something more akin to a normal good, exhibiting wealth effect behavior in choosing more of it with per-unit income rises. A 1997 paper examining the behavior of cab drivers suggests that a significant inelasticity of the labor supply of cab drivers manifests itself on busy days, when cab drivers can typically make an increased amount of money in a shorter span of hours5. This gives a new supply-side twist to the idea that it is harder to catch a cab in the rain.*

Another major manifestation of choosing leisure over labor is a bit more cloudy. The labor force participation rates for women rose from about 35% in the 1950s to over 75% by the early 2000s, but has since stalled out and even fallen slightly since the financial crisis relative to men. Some evidence suggests that this is due to the fact that the time requirements for mothering and raising a family, unpaid work which is generally lumped in with leisure in the simple models of economics, simply cannot be compressed beyond a certain point at which time the marginal product of an extra unit of labor becomes very costly at any hourly rate of income. For this reason, growing numbers of women are choosing to forgo labor, at least in full-time terms, for the “leisure” of fulfilling their own needs and expectations of child rearing and the like.

Finally, and anecdotally, my own experience in returning to school as a working adult is an example of consuming what, again (from the point of view of money income) is the leisure product. From my own view, being able to reduce my hours worked while holding my income steady is what I would consider to be a wealth effect choice. Given an increasing return per unit of labor I supply, due to the successes in my business enterprise, I benefit from a decreased opportunity cost in returning to school. A worthy tradeoff in my opinion, and one that may hold many positive possibilities to our current employment woes in the US.

* Though, interestingly, the effect dominated in this paper tends to shrink with the experience of the drivers, demonstrating a sort of mean reversion to the more standard “rational actor” behavior of consumption smoothing.
† Notwithstanding laudable increases in gender equality with respect to parenting and household duties, the tendency in the aggregate is very much that this role is typically still filled by women.
Sources (non-PDF sources included as links):
1 Alesina, Glaeser and Sacerdote “Work and Leisure in the US and Europe. Why So Different?” Harvard Institute of Economic Research, April 2005         
2 Mankiw, N. Gregory “Principles of Economics” Southwestern-Cengage Learning, 2009, p.457
3 Krugman and Wells “Economics” Worth Publishers, 2006, p. 300
4 Alesina et al. “Work and Leisure…”
5  Camerer, Babcock, Lowenstein and Thaler “Labor Supply of New York City Cabdrivers: One Day At a Time” Institute for Research on Poverty – University of Wisconsin-Madison, 1997
(111225: edited for clarity)

About theunlikelyeconomist

theunlikelyeconomist is in the midst of the long slog to attain a PhD in economics.
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