Thursday, May 21, 2009

What is seen and what is unseen for May 21, 2009

In keeping with the general theme of this web log, I would like to illustrate the principle that Frederic Bastiat so keenly illustrated in his parable of the broken window. A good economist will take into account the effects of an action or policy on all groups, across all time scales. With that in mind, let's take a look at a new policy proposed by Rep. Alan Grayson (D) from Florida.

The Paid Vacation Act will:

"...require companies with more than 100 employees to offer a week of paid vacation for both full-time and part-time employees after they’ve put in a year on the job. Three years after the effective date of the law, those same companies would be required to provide two weeks of paid vacation, and companies with 50 or more employees would have to provide one week."

Sweet! Who doesn't like vacation, right? The idea here is that more vacation days increase worker productivity and happiness, and result in people using less unnecessary sick days. These developments are claimed to stimulate the economy. They certainly sound good. What worker wouldn't want more paid vacation time? These workers would most probably be happier and may be more productive as a result.

Here is what we'll see if the bill is passed: more people on vacation and a boom in the travel industry. Will overall productivity increase? Let's look at what is unseen:

  • Requiring businesses to provide paid vacation raises the costs for business because workers are being paid not to be productive. If the cost of business increases, it becomes more difficult for employers to hire new workers. Some workers might even have to be fired for the business to continue running at a profit. We don't see the workers retained or barred from entry.
  • Employees are currently producing during what would become paid vacation. The money they earn from their production may not go to the travel industry, but it would go somewhere - and the community will be richer for it. For example, the workers in a TV manufacturing plant will have produced 100 televisions and have money in their pockets to spend on home improvements. Now the community has more TVs and job growth in the home building sector. We wouldn't see either of them.

Just for kicks, lets examine unintended consequences as well. Mandatory paid vacation time effectively subsidizes an unproductive activity, and doesn't remove the incentive for people to use sick days. This is what happens when subsidies are introduced into the marketplace: demand goes up because the good is perceived as "free". Once workers get a taste of paid vacation time they are likely to demand more of it. Thus a more likely scenario is that people will begin to use both paid vacation and sick days, and in time demand an increase in the number of paid vacation days. The article cited unwittingly points out the truth of this.
"France currently requires employers to provide 30 days of paid leave."
The Paid Vacation Act will restrict employment capacity, lower productivity, and restrict the community's ability to accumulate wealth. At least we'll see more Americans taking vacations during these tough times.


  1. This senator is unbelievable: "Rep. Alan Grayson was standing in the middle of Disney World when it hit him: What Americans really need is a week of paid vacation."

    It's like he got confused and thought he was living in a fantasy world where Mickey Mouse and Snow White have taken the place of logic and reason.

    I don't see how exactly it's a subsidy though... It's more like a price floor ( that takes us further from the equilibrium level of price and quantity of labor.

    And I'm not sure that it's exactly like Bastiat's parable, though I see what you mean about the seen and unseen. I think it's more like minimum wage laws, where the main arguments come from "fairness." (But by the way, a month off in France? I guess socialism has its perks.)

  2. Yes, a revelation about work ethic while vacationing in Disney World should certainly qualify as suspect...

    I see what you're saying about the subsidy part. I changed the text to "effectively subsidized" because it forces businesses to pay $X toward vacation time. Even though it isn't Federal dollars, the effect is the same. From Wikipedia: "A subsidy can be used to support businesses that might otherwise fail, or to encourage activities that would otherwise not take place" So I guess my mind conceived of it in the second sense.

    As far as the comparison to Bastiat, Henry Hazlitt wrote a book exploring various fallacies that are all essentially variations of that idea. Minimum wages was actually one of my favorite chapters.

  3. Why are we do we offer the least vacation days for an industrial country and our economy is in the toilet incomparison to the others..... by your argument should it not be the other way around?

  4. Aaron: show me the other economies that are not in the toilet... Are you referring to Europe? Asia? Australia? Africa? Latin America?

    I'm pointing out that this law will increase unemployment and lower productivity. I ask you: How can ANY nation become wealthy and prosperous by increasing unemployment and lowering productivity?