A vice president of a company argues that the president of the company should raise
workers’ wages if the president wants less absenteeism. The president says that
wages probably should be cut so that the workers could not afford to miss so much
work. Evaluate the two views using the income and substitution effects in your
analysis.
To evaluate the two views using the income and substitution effects, we need to consider how changes in wages can impact the behavior of workers.
1. Income Effect:
The income effect refers to how changes in income (in this case, wages) affect workers' purchasing power and their decisions regarding work and leisure. If workers' wages are increased, they will have more money to spend, which may lead to a decrease in their motivation to work. This could potentially result in higher absenteeism rates, as workers may feel they can afford to miss work more often.
On the other hand, if workers' wages are decreased, their purchasing power will be reduced, and they may be more motivated to work in order to meet their financial needs. This could potentially result in lower absenteeism rates, as workers would have less flexibility to miss work due to financial constraints.
2. Substitution Effect:
The substitution effect refers to how changes in wages affect the trade-off between work and leisure. When wages increase, the opportunity cost of leisure time (foregone wages) becomes higher, leading workers to allocate more time towards work. As a result, higher wages may lead to lower absenteeism rates, as workers have a stronger incentive to prioritize work over leisure.
Conversely, when wages decrease, the opportunity cost of leisure time decreases, making leisure more attractive compared to work. This could potentially lead to higher absenteeism rates, as workers may prefer to take more time off work due to the reduced financial incentive.
Evaluation:
Based on the income effect, the vice president argues that increasing wages will likely result in higher absenteeism rates, as workers will have more financial security and may be less motivated to come to work regularly.
On the other hand, the president suggests that reducing wages could potentially lead to lower absenteeism rates, as workers would have a stronger financial incentive to prioritize work over leisure.
Both arguments have valid points based on the income effect. However, it's important to note that the substitution effect can also come into play. If higher wages result in a stronger incentive to work, the substitution effect may counterbalance the potential increase in absenteeism driven by the income effect. Conversely, if lower wages decrease the incentive to work, the substitution effect may work against the potential decrease in absenteeism driven by the income effect.
In conclusion, the ultimate impact of changing wages on absenteeism rates depends on the relative strength of both the income and substitution effects, as well as other factors at play. Further analysis and empirical evidence would be needed to determine the most effective approach.