Why is annual leave entitlement so rigid?

This one is a tough nut to crack.

Most employees in permanent, full time jobs are offered a very specific deal on the number of days they can take off, and deviations are allowed only in extreme circumstances. Recently, mainly driven by a desire to accomodate working mothers, there has been some change: for example, part-time contracts (the four-days-a-week sort) have become more common than in the past.

But the basic pattern remains the same. Even at times workload is low (and thus the productivity of the marginal worker is low or zero), an employee who so wishes is not allowed to 'purchase' (for example by foregoing the corresponding part of his salary of multiple thereof) extra days off from his employer.

This is a puzzle to me, because I know for a fact that such an option is valuable to both employees and employers. Personally, I would forego up to £5,000 ($10,000) for the ability to purchase extra days from my employer at times my presence is not required. If I was an employer, I would also be happy to save on labour costs during times there is some excess capacity, or alternatively be able to hire the best talent at lower hourly rates simply by agreeing to fewer total days of work.

To put this in an economic framework: In many circumstances, it must be the case that the there is a sum of money X an employee can pay an employer for extra days off, with X being less than the worker's expected productivity during those days and less utility enhancing to the worker than those extra days. Yet I've never heard of such a transaction taking place, even implicitly. (That's not entirely true. During my National Service, extra days off were given to soldiers that were particularly productive. That was a special case, however, as monetary compensation was simply out of the question: a conscript's monthly salary was fixed at 8 euros.)

Salary and annual leave are both elements of the compensation workers receive. Why is the former so flexible and the latter so rigid?

A potential reason could be the existence of a sclerotic legal framework, but even this is not a particularly convincing explanation: tales of government incompetence aside, if the demand for reform was there it would have happened.

The only half-satisfying explanation I can come up with is path dependence. Back in the days of industry and the conveyor belt, a worker's productivity was essentially determined by attendance. 300 days in front of the conveyor belt meant two times more 'product' than 150 days. At the same time, pay was determined by employer-union negotiations: there were no 'high-performance' employees standing to gain by breaking ranks and going it alone.* Collective wage bargaining is, well, collective; and as a result everyone in the union simply accepted the wage and leave settlement that maximised the median member's utility.

Today, while there is no shortage of super market tills and call centres, more jobs have become 'flexible' and potential improvements in pareto efficiency have become possible. However, the institutions (management norms, employment law) surrounding performance pay and non-pecuniary benefits such as annual leave take time to adjust.

Commenting on the rise of performance related pay, Tyler Cowen writes: 'For me the puzzle is why the world held back so much on bonus pay for so long.'

I am wondering the same about annual leave. Is it long before I can purchase some much needed extra days off from my employer?

*More on the 'productivity spread' and the rise and fall of unions soon.


  1. Anonymous Says:

    For professional jobs it seems likely that allowing employees extra days off could reduce their future productivity. For example an economist who works 48 weeks per year will be more than twice as productive as an economist who works 24 weeks per year at busy times: In quiet times they have a chance to develop their professional skills etc. whereas the part timer will not have the quiet time to develop their skills and will continue to be learning on the job. Thus they will be more productive next year. This is more important for mid to late career proffesionals who are likely to enjoy an extended tenure and are unlikely to progress substantially.

    In this way a limited amount of time of could form an equilibrium in some circumstances.