Spooky Economics 101 (not voodoo!)

A socialist comrade and I have been discussing the need for more vacation among our overworked brethren. He insists a European style state-regulated system is required. I insist we increase vacation time more dramatically and without all the evil. Here's what I mean...(comments please!)

Securing more vacation time is too valuable to release to the black hole of governmental regulation. The consequence of such plans almost always has the opposite effect of what their well intentioned advocates expect. Passing a law such as this has the unavoidable consequence of lowering the amount of income that can be devoted to vacation days.

Oh, you don't mind trading income for vacation? OK, let's assume you only want to earn $1000 a year for food and take the rest as vacation.

Let's say your skills are worth (for easy math), $52,000 a year on the free market. You sign a contract to work for a company for one week. You plan to earn your $1000 and take the rest of the year off.

But wait, the government suddenly passes a law requiring 25 days of vacation per year - this is 10 more days than before. The company currently employs 100 other employees and now must hire approximately 3 additional employees to make up for the 1000 days of work being missed this year. Of course, the company needs to get the same amount of work done in order to pay its existing employees' raises etc. It simply adds 3% to its workforce.

Now, let's take the best case scenario and not include any costs of finding the new employees, providing medical insurance, or training. Let's say the additional three employees magically appear and pick up the required work perfectly. Since this is a national law, all companies need to do this.

Wait! the country doesn't have 3% more people - certainly not 3% more qualified people! Why didn't we think of that?! Oh no's.

The company now requires its workers to be 3% more productive, but they were already working at 100% productivity. The company loses revenue, and cut expenses. This is a technology company, so its workers are its primary expense. All employees get a wage reduction of 3%.

This 3% translates to a hidden tax lowering the amount the company can pay any new employee for any position. (This would be much higher considering training etc.)

Instead of $1000, you are only offered $970 for the same week's work. You are now required to work either 3% more productively or 3% longer than before the vacation law.

Now, in reality, this type of law simply increases the lowest common denominator for worker requirements. It now can only afford employees who are much more productive - especially considering the extra expenses (medical, training etc.). This is why the unemployment rate is about 10% in Europe compared to 4% in the US. More unemployment means higher corporate taxes to afford the expanding welfare state. Higher corporate taxes means less money for payroll = less money for vacation and even higher productivity requirements to keep the company competitive - which is a losing battle.

As much as they try, these workers will not be able to make up for the difference and will end up working during vacation being paid under the table (breaking the law) to keep the company afloat while perfectly able workers beneath the government manufactured productivity threshold are eliminated from the workforce and destined to ride the wave of the welfare state.

Now, if any of the above makes sense, I can also tell you how we could just as easily increase worker income about 30% (which would translate to 30% more vacation without any sacrifice to standard of living) while lowering unemployment and increasing productivity. I'll save this for another blog.