Question

If a firm offers paid leave, what should a firm do while the worker is on leave; should it continue to produce at an inefficient level while the worker is away or should it incur the costs of hiring a temp.? Explain your answer using economic reasoning, cite sources if appropriate.

Answer 1

A labour ( mostly skilled) is hiered on contract basis providing the limit to paid leaves, medical leaves , unpaid leaves etc. The design of the contract is such, both for private and public, the limit for paid leave is fixed and incentives may or may not be given if the leaves are not utilized. The economics behind this is , the labour now faces an opportunity cost, that by letting go off the leave, he can encash on it.

The plan is formulated with a view that at no time will full labour go on leave, and the company can afford to pay for the leaves taken, as the firm is still working and making at least normal profits . While in situations like holidays, when almost every part is shut down, the company puts in incentive for higher per day wages during the fall of labour supply due to holidays.This offerces the labour again a choice to encash over on holidays, and might get bonus of exceptional services to the company.

Let us consider a case when the company shuts down completely. In such a case, the economy now faces a situation where shortage of labour can effect the production and profits. In such a paid leaves can be terminated , in order to restore the company to path of profit making. The wages of employed workers depend largely on profit making of the firm they work in, hence letting go of paid leave is not a very difficult choice for the emplyees.The company might shift to hiering of temperary labour. This is even more risky for the permanent staff as replacement might take place if company is able to extract higher efficiency of the temp. labour. Hence workers again can be negotiated to give up their paid leave during such time, when the firm is not making any profits.

Hence these are some situations the firm and it's workers might face, in view of giving and recieving paid leaves.