Wasn’t there this idea going around that we could explain business cycles through intertemporal substitution of labor supply? (Without the jargon, this means that people work less in times when they are less productive and more in times when they are more productive, so small shocks to productivity — due to random things like weather — tend to have much bigger effects on output.)
Well, it rained here on Wednesday and Thursday of last week, so my roofers spent most of the day pressed up against the garage door trying to stay dry and waiting for little breaks in the rain so they could get something done. On Saturday and Sunday, the weather was beautiful and they didn’t show up. Now it’s Monday and they’re back to work.
How are you paying your roofers? For the job, with a penalty for a delay in completion beyond some agreed date? For the time they spend at you place, whether they huddle or work? Only for the time they spend working? How are weekend days treated? Etc, etc.
Since most of the ways of paying people that strike me as sensible also seem to exacerbate the business cycle (on this theory of it), maybe business cycles are a sign of a well organised economy and a price worth paying.
They were simply optimizing their utility. They preferred working on a rainy day and spending the nice weekend enjoying the weather than working on nice weather and spending a rainy day pent up inside twiddling their thumbs (they probably don’t have HBO).
There is something called the cab driver’s fallacy. Cab drivers apparently have an idea before they start how much they want to earn that day. So days when they are unproductive, they work really long hours. When they are productive (maybe it is raining and there is a train strike) they work only short hours. Thgi spresumably arises because they discount factors other than their own labor on their productivity.
Perhaps they got caught with an exposed roof and felt a need to at least get things shored up to a point they could leave it to dry out for a day or two. Perhaps their union also prohibits them from working weekends.
In bad job markets people often go back to school so they’ll be more productive when conditions improve, so there is clearly something to this.
Harold – it seems more logical for the cabbie to work a little longer on a good day and take the next day off
Iceman: “it seems more logical for the cabbie to work a little longer on a good day and take the next day off”
That’s why it’s a fallacy. :)
Right…just checking :) His last sentence confused me as to whether he was ‘rationalizing’ it. I’d be skeptical as to whether this is really a common practice among cabbies, but maybe driving around listening to the radio has leisure value of its own?
Iceman – the effect had been measured by Camerer et al.
“Because drivers face wages which fluctuate from day to day, and can work flexible hours, the intertemporal substitution hypothesis makes a clear prediction: Drivers will work longer hours on highwage days. Behavioral economics suggests an alternative prediction: Many drivers told us they set a target for the amount of money they wanted to earn that day, and quit when they reached the target. Daily targeting makes exactly the opposite prediction of the intertemporal substitution hypothesis: When wages are high, drivers will reach their target more quickly and quit early; on low-wage days they will drive longer hours to reach the target.
http://people.hss.caltech.edu/~camerer/web_material/cabscvfbook.pdf
An impressive 3 colons and one semi-colon for a short passage. But the outcome is they found negative elasticities. “This means that drivers tend to quit earlier on high wage days drive longer on low wage days.”
They repeated this in New York and Singapore.
So it seems the taxi driver’s fallacy is real.
This is very counter-intuitive for those used to thinking like an economist, but possibly would sound reasonable to many people.
“possibly would sound reasonable to many people.” Including roofers.
@Harold
You see the cab driver’s fallacy with poker players too. In his book on The Theory of Poker — which is a fascinating book (and I never play poker) — Sklansky discusses it (not under that name). Bar owners seem smarter.
I would just throw out a caveat that the fallacy might apply more to “jobs” that have some inherent leisure utility too. Like playing cards or driving around listening to the radio. Seemingly unlike roofing tho
The RBCT is just an example of economists who are overly in love with mathematics trying to make reality fit the model.
Human beings are NOT rational utility maximizers (they just seem to be 80% of the time), information is not perfect, and economists should look more to sociology and less to physics for inspirations on how to understanding their field.
Alternative theory – maybe they’re worried if they don’t drive every day they will lose their human capital formation? Research topic for Daniel :)
Very funny!