August 2003, Vol. 126, No.8
Theory and new measures
Vacations and work hours
Précis from past issues
Theory and new measures
The macroeconomic textbooks have changed over time. The concept of a "natural" rate of unemployment has become more broadly accepted, while, at the same time, the notion that the natural rate is a constant has become less so. According to Robert E. Hall’s conference paper in the May issue of American Economic Review, today’s macroeconomists tend to see the natural rate of unemployment as "anything but stable."
Hall then outlines today’s textbook (David Romer’s Advanced Macro-economics) theory of the determinants of the natural rate. In that model, according to Hall, "…the unemployment/vacancy ratio, x, is an increasing function of the turnover rate, s, and the interest rate, r. Increases in these factors reduce the benefit of employment and cause substitution away from vacancies and toward unemployment. The unemployment/vacancy ratio is a decreasing function of the output/[capital equipment] rental ratio, z. A higher value of the ratio increases the benefit of employment and results in substitution toward vacancies and away from unemployment." In turn, the unemployment rate is determined by the separation rate and the job-matching, or hiring, rate.
After making a standard assumption about the form of the job matching function, Hall outlines the impact of exogenous changes in the model’s fundamentals. Raising the separation rate is termed a "reallocation shock." Of course, the unemployment rate goes up as a result, but so does the vacancy rate as employers try harder to fill their payrolls from the larger stock of available workers. In contrast, an increase in the output-to-capital rent ratio yields a straight increase in the demand for labor—unemployment goes down and vacancies go up.
Reallocation shocks thus actually move the Beveridge curve (an inverse relationship between unemployment and vacancies), while demand shocks move the labor market along the existing Beveridge curve. Hall uses data from the BLS Job Openings and Labor Turnover Survey (JOLTS) to test the model against labor force developments in 2001 and 2002. During the period under study, the unemployment rate rose 1.3 percentage points and the vacancy rate fell 0.7 percentage point. This corresponded very closely with what the model would predict for a movement along the Beveridge curve. However, the model would also predict a precipitate decline in labor productivity—a prediction that was not born out in the data. Thus, Hall says that it is "premature" to declare the search for a theory of unemployment that fits all the data of the actual labor market.
Vacations and work hours
The United States does not mandate vacation and holidays. In contrast, according to Joseph G. Altonji and Jennifer Oldham, in an article appearing in the Federal Reserve Bank of Chicago Economic Perspectives, report that most European nations mandate some minimum paid vacation time and that mandate is as high as 5 weeks in some cases.
It’s not that Americans don’t get any time off; indeed, the BLS Employee Benefits Survey shows that about 4 out of 5 American workers have access to vacations and holidays. In the 1930s, 1940s, and into the 1950s, it seems, Americans and Europeans took roughly similar amounts of paid vacation. In the following decades, however, continental countries raised their mandated vacation minimums by an average of a week per decade, while the United States (and the United Kingdom) continued to leave vacation time to private negotiations.
Altonji and Oldham perform a standard regression analysis of the impact of an additional week of mandated vacation on the average annual hours of workers in the United States and nine European countries (including the United Kingdom). According to their results, once country- and year-specific effects are taken into account, an extra week of mandated vacation is associated with roughly a 52- hour reduction in annual work time. "This," say Altonji and Oldham, "suggests that the laws have bite, and that workers do not respond to them by working more hours per week or by holding additional jobs."
The structure of the model used by Altonji and Oldham permits them to tell how many hours workers in individual countries would work relative to workers in the United States if there were no legislated vacation minimums. In Spain and Finland, workers would actually work quite a few more hours than Americans if there were not mandated vacations. On the other hand, workers in Germany, Italy, the Netherlands, Norway, Sweden, and the United Kingdom would work fewer hours if there were no vacation mandates.
The case of the United Kingdom is somewhat curious. As noted before, the United Kingdom is another country that leaves vacation policy up to private negotiations. Ajtonji and Oldham speculate that the powerful role of labor unions in the British economy through much of the post-World War II era may account for at least some part of this apparent anomaly.
We are interested in your feedback on this column. Please let us know what you have found most interesting and what essential reading we may have missed. Write to: Executive Editor, Monthly Labor Review, Bureau of Labor Statistics, Washington, DC. 20212, or e-mail MLR@bls.gov
Within Monthly Labor Review Online:
Welcome | Current Issue | Index | Subscribe | Archives
Exit Monthly Labor Review Online:
BLS Home | Publications & Research Papers