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The seeming dichotomy between labor and leisure

Is there really a choice between income and leisure?

There seems to be the trade-off between consumption and labor that all employees face. In reality, labor choices are not varying with income and hourly wages 

The example is in every microeconomic textbook: Given an hourly wage and such a utility from every hour of leisure, what is the optimal choice. Lagrange-optimization or multilinear optimization, concepts that all alumni of Economics look back on and are happy to have passed through. What seems obvious, is that with a varying (hourly) wage the optimal choice of labor and leisure varies. Reality, however, paints a different picture. In time series-analysis we can see that since the 1930s time spent at work has not changed, and contrary to hunter-gatherers we work even more at higher living standards. In general, two trade-offs are possible: Either more income makes you work more, a dominating income effect; or more income makes you work less, a dominating substitution effect. Again, in reality we see neither of the two. Cross-sectionally, people roughly work the same independent of income and after pay-rises hours worked also remain fairly constant. What we might observe is that either there is no effect – or that the two effects exactly balance out.

Hence, is there something wrong with the problem, or are we just dealing with a totally simplified problem? The answer lies, as always, somewhere in between. Of course, we are dealing with many simplifications: No labor market, no fixed contracts, exogenous utility of leisure but they do not make the whole story. The matter can be brought down to these three points: labor as a status good, unconsciousness and inflexibility.

The first point is labor as a status good. Piketty coined the notion that with increasing taxes we do not work less as we define ourselves through the jobs and positions we hold. The same can go for increased wages, which will never motivate us to work less as we may show off with new titles or benefits. What generally seems to hold is that people value increases in material living standards more than increases in leisure time. This also goes against the – at least for Gen Z common – notion that time is our most valuable asset and should be held dearest. 

The second point is unconsciousness. This relates to the fact that in light of pay rises there is often no explicit decision involved in how much one chooses to work. As soon as a pay rise is received, the individual sooner or later gets used to the new amount in their account and adjusts his desires accordingly. This goes against the notion of exogenous desires and needs as proposed by these simple models and refers rather to insatiable human desires which will always use the means available to broaden themselves. Therefore, the whole discussion also revolves around rationality and whether needs and desires are synonymous (and even exogenous) when talking about utility.

The third point, inflexibility, is linked to current labor markets. Simply stated, most contracts require an employee to work certain hours and are relatively inflexible and hard to negotiate, even later on. Although sometimes pay rises are passed on for more vacation days, the discussion to instead decrease time at work is relatively new. It further holds, that with promotions and pay rises obligations and hence time worked rarely become less. This rigidity further promotes that there is rarely any effect of pay rises on the actual labor decision. 

Lastly, a prominent classical argument – that of first earners – is not applicable here. In the case of taxes, it is usually assumed that the labor decision of first earners is less elastic than that of second earners as the family depends on the income. Now, making the reverse case of rising income, the family depends less and less on this income, given exogenous needs – important emphasis on needs. If again desires are of concern, then the story is completely different. With rising income there should, if anything be a higher elasticity of labor hours subject to wage – but we see almost none.

In the end, the puzzle of labor vs leisure remains. Certain factors in the real world lead to the fact that higher incomes have almost no impact on how much people work in industrial countries and also rising living standards over time have not altered this decision much during the last decades. While the discussion about needs and desires and especially their endogeneity remains an exciting subject for further study, let it here be noted that both labor market rigidity, human desires for material wealth and partially missing rationality are the driving forces between this unobserved theoretical effect.