Why do people work more hours then they would like?

The writing of this post was prompted by an interesting twitter exchange between Rabee Tourkey and David Sligar

https://twitter.com/RabeeTourky/status/1638276211653881857

https://twitter.com/RabeeTourky/status/1638283440218062848

https://twitter.com/DavidSligar/status/1638414550864375809

https://twitter.com/RabeeTourky/status/1638433500188770305

I find David’s contention that being money poor but free time rich allows for the planning and enjoyment of relatively cheap leisure activities to be true of my own experience.

But Rabee raises a good question that deserves an answer. If workers spend little in retirement, why do they not choose to work shorter hours then they do? It’s worth pointing out the assumptions that underlie Rabee’s question. He assumes the labour market is a place where workers can sell their labour in a quantity of their choosing at a time of their choosing.

I suspect most workers’ experience is radically different. Just ‘working less’ isn’t an option if they want to keep their job or maintain a job that pays well. There tends to be a trade off between flexibility and pay plus job security.

But just pointing out that workers don’t experience the labour market as a place where they can control when and how much of their labour to sell isn’t enough. We need an explanation for why the labour market operates this way.

Labour market inefficiency

As anybody who has endured a frustrating job search knows, having the ability to do a job and convincing an employer to hire you are not the same thing. A dominant inefficiency of the labour market is that worker quality is only partially observable by employers. Employers can deal with this by adopting a cautious approach and becoming reluctant to hire. This isn’t the only reason why employers might hire less than efficient markets might predict as employers tend to have some price setting power over wages incentivising them to pursue a short staffing business model to increase profits. The realization of this phenomena has recently shaken up the academic understanding of the minimum wage, overturning decades of consensus in favor of an economics 101 approach.

How might these labour market inefficiencies lead to workers working more than they want to?

Fairly easily I suspect.

Suppose an office worker wants to take a six month sabbatical. The immediate problem is upon returning to work they will have to undergo all the risk and expense of finding a new job. And because worker quality is not observable, new employers will tend to underrate their ability more so than an existing employer who knows what they can do. And of course taking a break will itself be seen as a sign that one is a ‘slacker’ and less committed to work. It all amounts to lower pay and job quality. Not because the worker who desires greater work life balance is putting in lower quality work. Because of how employers use the power they have in the marketplace to increase the frictions associated with changing jobs. And because of the incentives created by the non observability of human capital.

Add to these problems that presenteeism is often used as proxy measurement for worker effort and commitment.

Winner takes all pay structures

Many large organizations use a top heavy pay structure to incentivise workers to fight hard to climb the greasy pole. Similarly to a situation where presenteeism is used as a yardstick for worker ability this creates incentives for workers to put in maximal work effort regardless of current life satisfaction in the hope of gaining windfall payoffs in the future. In this case the gain for workers from putting in longer hours than they would prefer is the option value of a ‘potential’ promotion. Therefore workers who fail to get promoted doubly lose — they’ve worked longer hours then they would prefer for the low rates of pay

Not only do top heavy pay structures incentivise workers to chase after potential windfall gains they can also work by stimulating natural human instincts of competitiveness — quite apart from a rational calculation about work vs leisure. Therefore it’s not surprising that large orgs use these pay structures to help create a culture that encourages workers to ‘row faster’.

However where the prospect of promotion is real it makes rational sense for workers to put in undesirable levels of work effort. In such situations we might expect overspending on low quality recreational activities. The expectation is that income will rise in the future meanwhile leisure is a human need even if it’s just to manage toxic stress.

Summing up

Are the above explanations enough to support a hypothesis that the labour market is inefficient failing to allow workers to sell their labour at the amount and time of their preference with the result that they, the worker has an un optimally high income during working years and experience a windfall gain of free time in retirement with the possibility of oversaving and income they don’t need?

I think the answer is yes, at least to the best of our knowledge. However others may disagree.

It’s a non-trivial issue considering many Australian retirees spend remarkably little of their financial resources which has prompted many to question if the Superannuation system might be encouraging oversaving.

I left a lot of important frameworks out of the discussion above, such as any role for wider social norms. You only need to have a passing familiarity with Japan and Korea to realize work hours aren’t just set by agents interacting in some kind of marketplace or bargaining context but wider social norms and structures likely play an enormous role. Perhaps sociologists can tell us as much about work hours as economists can.

Overall the idea that workers simply sell the amount of labour they want is part of what I see as the pernicious econ 101 view of everything. Whilst some economists keep insisting that its a straw man to criticize the economics profession for rigidly applying the standard models of efficient and competitive markets, the reality is a substantial minority of economists do indeed fit this cliche. A lot of professors simply browbeat their students with some version of econ 101 trying to convince them that any public policies are ‘unscientific’.