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Posts Tagged ‘indifference curves’

Finish at 3.30?

There are countless people who work 12-hour days – some get rewarded with huge salaries, while others are paid peanuts. A key question is: are these people happy? With 24 hours in a day for both rich and poor, the more hours we work, the fewer hours we have for leisure time. So, how do we choose the optimal work-life balance?

In economics, we often talk about the concept of diminishing marginal utility and this concept can be applied to working life. For many people, each additional hour worked is tougher or adds less to your utility – we get tired, bored and the job may seem more unpleasant the more hours you work. The typical day of work is around 7-8 hours, but across Sweden, some offices are now closing at 3.30, with a 6-hour working day, but with salaries remaining the same. It’s not a new idea in Sweden and trials of this shorter working day concept have proved successful, with higher reported profits, better service to customers (or patients) and happier, more productive staff.

This shorter working day is not a common occurrence across Sweden or other countries, but it’s a practice that is certainly garnering media attention. Companies will certainly be keen if this means an increase in productivity, but one key concern will be the potential loss of business from companies who do keep working after 3.30 and expect phones to be answered.

It would certainly be an attractive prospect for employees and perhaps is a good way of ‘poaching’ the best staff and hence of boosting worker productivity. With more free time, perhaps an employee’s happiness would also increase, which could have significant effects on a range of variables. The following article considers this shorter working day.

The truth about Sweden’s short working hours BBC News, Maddy Savage (2/11/15)

Questions

  1. Explain the concept of diminishing marginal utility with respect to hours worked. Can this be used to explain why overtime often receives higher rates of pay?
  2. Using indifference analysis, explain how a change in the number of hours worked might affect an individual’s happiness.
  3. Why might a shorter working day help to increase a firm’s profits?
  4. If a shorter working day did increase happiness, what other factors might be affected? Does this explain why other countries are so interested in the success of this initiative?
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Imprisoning prisoners with wage cuts

Through new legislation, the Ministry of Justice is aiming to make ‘offenders … take personal responsibility for their crimes’. The idea is to cut the wages of prisoners who work in communities, with the objective of raising £1m a year for victim support services. Any prisoner earning above £20 a week after tax, national insurance, child support payments etc, will face a 40% deduction in their pay. The money raised will be used to ‘repair the damage done by crime’ and begin to remove the burden from the general taxpayer. Critics, however, argue that this legislation will create a disincentive effect and discourage prisoners to work in the community before their release. It may also create additional bureaucracy for the external firms that employ them and at the end of the day may not even affect most prisoners, as many receive earnings, after all deductions, below £20 and so would not be liable. The following articles consider this policy.

Prisoners’ wages docked to fund victim support Associated Press (26/9/11)
Prisoners’ wages to help crime victims BBC News (26/9/11)
Prisoners to pay victims of crime The Press Association (26/9/11)
Victims handed £1m as prisoners suffer wage cut Independent, Nigel Morris (26/9/11)

Questions

  1. To what extent do you think the above policy is (a) equitable and (b) efficient?
  2. What might be the adverse effects of such legislation, from the point of view of both prisoners and the firms that employ them?
  3. What are the income and substitution effects in the context of a worker’s decision to work more or less hours?
  4. Using indifference analysis, explain how a fall in the prisoners’ net pay (due to this latest deduction) might have an impact on their desire to work more or less.
  5. Using your analysis from the previous question, explain the importance of the income and substitution effects.
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