Topic 2.2b - Fixed Hours Constraints. Professor H.J. Schuetze Economics 370

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1 Topic 2.2b Fixed Hours onstraints Professor H.J. Schuetze Economics 370 Hours of Work and Institutions To this point we have looked at the economic factors that influence hours worked However, institutions also play a large role in determining the number of hours worked by individuals So much so that we might think that the hours worked by an individual are pretty much fixed Most wage and salary earners are subject to the standard eight hour day and five day work week However, things like overtime, moonlighting, flex time and occupational choice can alter these arrangements Professor Schuetze Econ 370 2

2 Institutional Factors What is an institution? Dictionary: A long established custom e.g. marriage In the labour market: Are the hours we work a result of the influence of institutions? Professor Schuetze Econ Institutional Factors Unions have bargained to reduce working hours through: It could be that these factors are simply the institutional embodiment of the preferences of the work force Unions pushed for reduced hours because this is what the workers wanted egislation could change if individuals put pressure on the government to change it Professor Schuetze Econ 370 4

3 Trends in Hours The last 30 years have been marked by a polarization in hours Standard hours have become less common though average hours worked has remained the same Prime Aged Men and Women Why? Professor Schuetze Econ Trends in Hours Below standard hours: ould be voluntary choice because of the changing composition of the work force Above standard hours: Therefore, not all workers are substitutable Those with special technical skills may be encouraged by payforperformance schemes Professor Schuetze Econ 370 6

4 Moonlighting and Overtime Premiums et s examine the impact of the constraints imposed by institutions Why do some workers moonlight (often for less money) while others require a premium to work more? Answer: people who moonlight are underemployed at the going wage and those who require an overtime premium are overemployed What is under/over employment? Professor Schuetze Econ Underemployment Suppose the worker must work T hours or not at all Now suppose the worker would choose a point like D without this constraint T The worker would be better off at D than at This worker is said to be underemployed: Professor Schuetze Econ 370 8

5 Underemployment and Moonlighting D In fact, this worker would be willing to moonlight at another job for an even lower wage Now suppose the worker could work additional hours at another job that pays a lower wage T The worker would be better off at any point between and E (i.e. moonlighting) Professor Schuetze Econ Overemployment Suppose instead that the worker s preferences were such that she would like to work fewer hours than the fixed amount (T ) D T The worker would be better off at D than at This worker is said to be overemployed: Professor Schuetze Econ

6 Overemployment and Overtime Premiums The overemployed worker would obviously not wish to work more hours but could be compensated to do so Suppose the wage were increased for hours worked beyond the standard work week D T The substitution effect here is very large while the income effect is likely to be small (there is no shift) The worker has to work more to get the extra income Professor Schuetze Econ Straighttime Equivalent ouldn t we do away with overtime premiums by paying the straighttime equivalent? O The straighttime equivalent is derived by taking the income associated with point O and determining the wage that would yield the same earnings This is the average wage passing through O T Professor Schuetze Econ

7 Straighttime Equivalent Why didn t the straighttime equivalent work? The straighttime equivalent wage has a larger leisure inducing income effect The overtime premium is dominated by a substitution effect inducing work The overtime premium is paid only for hours worked beyond the standard work day Professor Schuetze Econ Gains From Flexible Work Workers preferences for flexible work time have been changing as we have seen learly many workers would benefit from a more flexible work schedule Are there any gains to be realized by employers who offer flexible work schedules? It can also be shown that firms may be able to lower wages and still maintain their work force Professor Schuetze Econ

8 Gains From Flexible Work For example: suppose the worker is overemployed D The firm could lower the wage while keeping the worker just as well of as before the wage decrease T The worker is willing to give up some income in order to have a flexible work schedule Professor Schuetze Econ Gains From Flexible Work Of course there are costs associated with providing a flexible schedule For example: Professor Schuetze Econ