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Sunday, February 8, 2015

A Trade off in the Division of Labor: Work and Leisure

"There are no solutions, only Trade Offs"~Dr. Thomas Sowell

This quote is a "truth" in the world of Economics. One of the specific examples of this "truth", is the trade off between Work(labor) and Leisure. Economic theory states the following: As a worker earns more income, his/her desire to have more leisure time increases. However, the more time the worker uses in leisure, he/she will eventually seek to obtain more labor hours.

This fascinating trade off can be displayed graphically, as shown here, specifically expressed with the comparison between the hours worked and the Wage Rate:

























This graphical display shows how the increase in the hours work, along with the increase wage rate eventually reveals that the worker will seek to work fewer hours, and spend more time in engaged in activities of leisure, cutting back on their hours. This explains the "back bending" shape of this graph. This may make sense to many, but why is this true? Why is this the case?

To address this question more effectively, one must dig deeper into two of the foundations of Economics: The Concepts of Utility and Diminishing Marginal Utility.

The Concept of Utility

This concept states that we rank, at any given time, goods, services commodities that we seek to acquire. We seek to use these things to bring us pleasure or happiness. This notion is subjective to each individual. Since we can not grab all those items at once, and resources are scarce, we must choose one item over another item in this utility(preference) ranking. We rank those items from most important to the least important based on that particular desire to fulfill satisfaction. An example of this would be what we would choose for dinner: e.g choosing Fast Food over eating at home. The choice for dinner would explicitly imply that the actor prefers one option over the other.

The Concept of Diminishing Marginal Utility

Another notion to consider in this labor/leisure trade off is the notion of Diminishing Marginal Utility. The notion of Diminishing marginal utility is the following: As the user consumes more of that good, the user begins to view the good as "less" valuable with each use of that good consumed, as his "wants" are being satisfied.  How do these two concepts tie into the notion of the trade off between Labor and Leisure?

The understand the trade off between these two activities, one must take the understanding that both are "goods", as utilized in a preference or utility ranking. As previously mentioned, an individual has limited resources, so he/she must rank those "goods" and prioritize them. As the Law of Diminishing marginal utility kicks in, the actor seeks to engage in more leisure over labor. Conversely, if the actor is utilizing more leisure, the actor will eventually look to seek to engage in more labor.

Conclusion

In closing, this trade off  is rooted in the notion of Utility and Marginal Utility. The framework of this trade off is central to many policy planning debates. An example of the consideration of this trade off is involved with the debate of unemployment benefits, and the extension of those benefits. Should unemployed people continue to receive benefits after the allotted time?. Many believe that the payment of these benefits impact the decision making process of the individuals in making this trade off. As the political debate rages for this issue, the trade off between Labor and Leisure will continue to exist.

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