There is an old, macho saying - "I will sleep when I am dead." In bygone times, sleep was considered unnecessary and unproductive time. Something to be minimized. We know better today. Sleep should now be part of our health routine. Just like exercise and nutrition. Science has taught us much about sleep in the last couple of decades.
About the author: Jeff Hulett is a behavioral economist and a decision scientist. He is an executive with the Definitive Companies. Jeff teaches personal finance and the decision sciences at James Madison University. Jeff is an author and his latest book is Making Choices, Making Money: Your Guide to Making Confident Financial Decisions. His experience includes senior leadership roles in banking and bank risk consulting. Jeff holds advanced degrees in finance, mathematics, and economics. Jeff and his family live in the Washington D.C. area.
Brad Krepps contributed to this article. Brad is currently an independent consultant specializing in marketing strategy and customer performance analytics. His experience also includes analytical leadership roles at multiple companies, including e-commerce, software, and financial services companies. He currently resides in San Diego, California.
Table of Contents:
Introduction - Sleep deprivation is linked to chronic disease and poor performance
Residency - The training ground for sleep deprivation
Misaligned incentives - The medical system thrives on sleep-deprivation
Greedy Work Impact - How sleep deprivation is a remnant of the Industrial Era-based legal system
Conclusion - How to convince your surgeon to get enough sleep and policy idea thought starters
Appendix - Professional services employment economics
Notes - When not explicitly cited, supporting medical references are provided at the beginning of the notes section.
Neuroscience recognizes a lack of sleep is strongly linked to chronic diseases, including neurodegenerative diseases like Alzheimer's disease. Thus, the updated saying is, "Not sleeping properly will cause you to be dead! Like smoking 2 packs a day." Study after study shows how lack of sleep causes metabolic disorders like insulin resistance and diabetes. Metabolic disorders have been PROVEN to be the gateway to other chronic diseases like neurodegenerative disease, heart disease, and cancers. In deep, delta wave sleep, spinal fluids are released to wash away excess "thinking" waste, like amyloid beta and tau. Excess waste is built up in persistent, sleep-deprived environments. Over time, excess waste produces tangles and synaptic death associated with Alzheimer's disease and dementia. Studies show that sleep-deprived people, over decades, tend to have more thinking waste built up in their brains. Overworking and a lack of sleep are related to heart disease and stroke. Behavioral studies by the Centers for Disease Control and Prevention (CDC) show a sleep-deprived person's driving responses are similar to that of a drunk driver. According to the Sleep Foundation, sleep-deprived people experience reduced concentration, slower thinking, and mood changes.
Society should widely understand this and the medical system certainly knows this - especially since it was medical researchers that authored the studies! The relationship between sleep deprivation, chronic disease, and poor performance is IRON-CLAD. The essential question we explore in this article:
Since the medical system knows:
Quality sleep is very important to leading a long and healthy life; and
Sleep deprivation leads to chronic diseases like metabolic, heart, neurodegenerative, and cancer; and
Sleep deprivation causes poor medical staff performance, leading to outcomes like the death of 18-year-old Libby Zion;
Then, today, why does the medical system encourage sleep deprivation in its own employees?
This article uses medical research and the tools of medical-focused economics to separate -
the research and evidence-based knowledge created by capable medical researchers and medical practitioners
- from the -
business of medicine.
In general, the medical system is full of very well-intentioned people. As we will explore, just because these two medical system participant types know sleep deprivation behaviors lead to chronic disease and poor job performance, does not mean the medical system will change any time soon. The medical system will likely not change until system incentives change.
2. Residency - the training ground for sleep-deprivation
There is a big gap between what the medical system KNOWS and what the medical system DOES. Old habits, especially habits reinforced by big, complex economic systems like the medical system, are very slow to change. The old, sleep-depriving habits are typical in the doctor training process called residency. Residency is where new doctors, fresh out of the classroom, get to practice doctoring under the watchful eye of experienced doctors. A first-year resident is known as an intern. Residency lasts for about 5 years, depending on the medical specialization. Peter Attia is an author and a doctor, specializing in patient longevity. Dr. Attia said:
There's a reason why medical residency is called "residency": You're basically living at the hospital, day and night, for the duration. At one point, I was averaging nearly 120 hours per week at work, often for more than thirty hours at a stretch.
The challenge is, residency is also a low-cost labor source -- which economists call a "factor input" -- for the profit-wise medical system. This is where medical organizations, like hospitals, get a great deal on inexpensive doctoring labor (residents do not get paid as much) and literally work the residents toward death. Residents may work in excess of 100 hours per week. Residency is both a low-cost doctoring labor input and provides a trained doctor as an output. At a high level, the residency-as-both-economic-input-and-output may seem like a good thing, like a social 2-for-1 sale. As we show, while starting with good intentions, this dual economic arrangement has devolved into a medical system conflict of interest.
The prior belief was that sleep-depriving long hours were necessary to achieve the trained doctor output. Admittedly, this is convenient, since this traditional belief aligns with keeping costs down and driving profitability. Today, the strength of the "sleep deprivation as a trade for the trained doctor output" argument has dropped dramatically. The updated belief results from more recent evidence that sleep deprivation leads to 1) chronic disease, 2) poor performance, and 3) is inconsistent with learning and enabling memory recall. Sleep deprivation reduces synaptic memory formation from the day's activities. Donald Hebb was a trailblazing neuroscientist. Hebbian learning is summarized by the contemporary research conclusion: "Neurons that fire together, wire together." [i] Memory consolidation from short-term memory to long-term memory is the essence of learning. Neuroscience demonstrates that the learning-enabled wiring physically CANNOT properly occur in a sleep-deprived state.
Side chat -> What is sleep deprivation?
According to research from the Journal of the Nature and Science of Sleep: Neurodegenerative disease, such as Alzheimer's disease, is associated "with increased fragmentation of the overall sleep–wake pattern, increased sleep during the daytime, increased frequency of nocturnal awakenings, and a decrease in both slow wave and REM sleep." [ii]
However, even with strong evidence regarding the negative impact of sleep deprivation, the medical system has strong countervailing economic incentives. These incentives reinforce this sleep-deprived, inexpensive, doctoring labor source. Additionally, the sleep-deprived incentive responses are fortified by hazing and student debt.
Hazing - There is a hazing effect at some jobs, including medical residency - as likened to a fraternity or even cult membership. Christine Wiebe is quoted in the Medscape General Medicine journal:
"Unfortunately, medical students who are mistreated often go on to become doctors who mistreat other medical students, creating a cycle of abuse."
The idea is that if people willingly subject themselves to something difficult in the interest of gaining entry into an organization, they will be more committed to that organization once they are inside. Hazing also has a self-reinforcing cyclical nature to it, resulting from emotional inertia. Those hazed in the past are more likely to haze in the future, even when objective feedback may suggest otherwise. Those that were hazed as residents are more likely to "return the favor" as supervising doctors. The emotional inertia may present as the supervising doctor attitude: "Hey, I know sleep is good, but I survived residency with little sleep. Why shouldn't the next new doc be put through the same pain I experienced!" This behavior serves as an additional benefit to the employer, to motivate the hazer and hazee to participate in the employer-sponsored ritual. This ritual results in the ongoing availability of lower-cost medical labor.
Student Debt - Medical schools are very expensive.
According to the Education Data Initiative, in the latest year surveyed, the average medical school graduate owes $250k in total student loan debt, including undergraduate loans.
According to the Association of American Medical Colleges (AAMC), in the latest year surveyed, first-year medical school costs between $40k and $100k, depending on state residency and whether the college is public or private.
The U.S. Federal Student Loan system provides access to Health Education Loans. These loans do not require repayment until the start of residency. Residents fear getting prematurely dismissed from medical school. Thus, the need to "salute the flag" and work extreme hours is necessary to endure the lower salary, treading the financial-water residency period. Residency completion is when they graduate to a higher-paying specialty. Only then is the doctor able to make headway on their debt repayment journey. It may seem the medical student knowingly chose this path. Not so much. Behavioral science teaches individual choice is greatly impacted by the choice environment. The University of Chicago behavioral economist and Nobel laureate Richard Thaler said [iii]:
"People have a strong tendency to go along with the status quo or default option.... Just as no building lacks an architecture, so no choice lacks a context.”
In practice, debt is a great choice-limiting sword over the resident's head. In the decision moment context, choice is more illusory. The residents' choice-voided singular priority is "do what it takes to finish."
To summarize, our medical system is actively incentivized to promote sleep deprivation in its own employees. Sleep deprivation is a feature of the doctor's development process. There is a deep and entrenched medical system sleep deprivation culture, fortified by hazing and student debt. Sleep deprivation is associated with, and in some cases causally linked to chronic disease, poor performance, and reduced learning.
3. Misaligned incentives - the medical system thrives on sleep-deprivation
We have a medical system that knows better but is NOT leading by healthy example. It is like the medical system gives their employees cartons of cigarettes with the not-so-subtle expectation that the cigarettes are smoked.
The captain obvious question is -- Given the health hazards to both doctors and patients, why doesn't the medical industry cap work hours? Pilots and truck drivers do! The simple answer is the medical system has no incentive to change its own behavior. The following truism is from the author of "The Jungle" and industrial age critic Upton Sinclair:
"It is difficult to get a man to understand something, when his salary depends on his not understanding it."
Today, chronic disease and other long-term costs associated with sleep deprivation are an externality absorbed by society, the doctors, and the doctors' families -- these externalities do NOT impact the medical system's more salient, short-term profitability. Also, as explored next, sleep deprived-based mistakes leading to poor patient outcomes are difficult to legally link up.
We intuitively know that a doctor performing surgery while drunk is a really bad idea. But how impaired were they? Were there other factors playing into an undesired outcome? In the case of sleep deprivation, there is no "smoking gun" to establish a negligent cause, such as the way a breathalyzer test is used to establish drunk driving to establish impairment. Without a smoking gun, reasonable doubt becomes the medical system's defense counsel tool of choice. Because medical environments are complex, motivated lawyers can build a reasonable doubt defense. Even though we intuitively know performing surgery while impaired from a lack of sleep or alcohol is a really bad idea.
Recommendations and laws to effectuate change have been made. The Libby Zion Law was put in place in New York after Libby Zion died at the age of 18. At her time of death, she was under the care of what her father believed to be overworked resident physicians and intern physicians. The Libby Zion law limits the amount of resident physicians' work in New York State hospitals to roughly 80 hours per week. The Accreditation Council for Graduate Medical Education ("ACGME") has also implemented recommendations and standards to limit residency hours worked. But most surveys show actual hours worked by all doctors (not just residents) have not changed significantly. Medical staff hours restrictions are not being enforced. That is, there is a persistent gap between sleep deprivation restrictions and medical system behavior.
Side chat -> Reasonable doubt makes addressing sleep deprivation very difficult
In the medical system setting, reasonable doubt is a very high legal standard. Reasonable doubt creates a standard that if there is any other “business-as-usual” reason that could have caused a bad outcome, then those accused are likely to be found innocent of negligence. Since surgery has no guarantees, there is ALWAYS a business-as-usual reason a bad outcome could occur. For example, if an infection sets in after the surgery, was that caused by an environmental factor out of the surgeon's control OR because the surgeon was operating on almost no sleep? In the hidden world of sleep deprivation, a strictly interpreted reasonable doubt legal standard almost guarantees those harmed by sleep-depriving medical practices will not achieve redress or change. The real world is complex. Simple, 1 to 1 causal conclusions like "a lack of sleep CAUSED the poor outcome" are rarely obvious and often obscured by the medical system itself. A wiser standard is to acknowledge that the impacts of sleep deprivation, while not as obvious at the time a medical service is provided, are significant.
Our legal system reasoning operates by precedent. That is, our legal system uses past legal decisions as a means to chart a course for the future. Today's science teaches that the past, sleep-depriving permissive legal precedents are no longer appropriate. A new, sleep-aware legal path needs to be blazed.
Author's side note: While I have never met Libby Zion’s parents, I can only imagine the uphill battle they faced to pass the law honoring their daughter. It makes me wonder how many other Libby Zion's there are, where the sleep-deprivation truth never comes to light.
The medical system's reality is - people in need of medical care do not take a time-out so the medical system can manufacture more doctors for that care. Medical training takes time. The medical system itself needs to change how it handles providing medical resources. Today, in a crisis, doctors are expected to be all hands on deck and work around the clock until the crisis is resolved. A periodic crisis is one thing - but persistent, chronic 55 hours plus work weeks have been shown to create a higher risk of chronic disease. Also, the employee optionality of being chronically "on-call" to potentially work long hours is likely part of the stress creating a higher risk of chronic disease.
Today, in the medical business workflow context, doctors are capacity gap fillers. When medical system capacity planning misses the mark, the gap is filled by increasing the hours of existing salaried doctors. Since the doctors are salaried, the marginal cost of an incremental hour of doctor time is $0. As we discuss below, rules and recommendations are not enough. To change doctors' and related medical system employees' hours worked, the incentives need to change. Until it is economically punitive to overwork doctors and other medical staff, the medical system will naturally resolve to the short-term lowest cost, effective gap-filling solution. The medical system needs a good reason -- re: an economic incentive -- to find medical resource alternatives. The good news is, those good reason economic incentives will likely accelerate the ability to use doctor time leveraging technology - such as teledoc, artificial intelligence, machine learning, and robotics, plus the training of paraprofessionals - to expand system capacity.
Imagine the medical business manager's attitude today: "We have a need to flex our doctor capacity from time to time. I'll just hit the 'easy button' and ask our current docs to work longer.... they don't cost us any more." Now, let's imagine the medical business manager's attitude in a world where medical resource overtime costs 1.5x hourly rates: "Oh crap, flexing our current doctor capacity will kill my income statement! I must invest in more doctors and technology to leverage the ones I have!"
A time-tested truism is that "Necessity is the mother of invention." However, lawyers and insurance company actions effectively blunt the "necessity" causing the chilling of "invention" to improve the medical system.
Research shows that sleep deprivation is the gateway to disease and impaired behavior. The medical system's sleep deprivation culture does not stop at residency. Over their career, doctors are encouraged to work well in excess of 55 hours per week. Above 55 hours per week is KNOWN as the breakpoint for increased chances of chronic disease. It is like residency is the training ground for teaching doctors to lead an unhealthy, work-impaired life. Residency is like where they were taught to smoke. Dr. Attia says:
"Looking back, it is shocking that such a cavalier disregard for sleep was tolerated, even cultivated, in a medical setting. It's almost as if they had encouraged us to smoke and drink heavily while on the job."
4. Greedy Work Impact - How sleep deprivation is a remnant of the Industrial Era-based legal system
Greedy Work Introduction: The notion of "greedy work" is straightforward. Employer labor demand incentives are to extract higher hours from their salaried employee supply. In the salary situation, hours beyond the standard 40-hour week have a 1 to 1 higher value, regardless of whether it is the 41st hour worked or the 100th hour worked. Also, trained workers cannot be manufactured immediately. So the existing, trained workforce becomes the best option to fill a capacity need. The employer's "greediness" incentives are understandable. However. in recent times, the long-term cost to employee supply has changed significantly.
This economic framework shows how the marginal cost of labor differs from employee supply to employer demand. Please see the appendix for a deeper dive.
For each graph:
Mutual surplus is where employees and employers find an hours worked win/win. The employee and employer both receive marginal economic value from these marginal work hours. In the appendix, we discuss why the employee's marginal cost may be lower than the employer's even though the hours worked are above the standard 40 hours.
Employee surplus is where employees receive the surplus. To the left of the mutual space, the salaried employee receives the surplus, as the employee is working less than the standard 40 hours per week expected of a salaried employee. [iv]
Employer surplus is where employers receive the surplus. To the right of the mutual space, the employer receives the surplus, where the employer's cost slope is fixed at 1, but the employee's marginal cost accelerates > 1 AND is above the employer's cost.
Traditional short-term labor supply curve: The graphic to the left shows the traditional belief that working well above 40 hours has a short-term mutual benefit to both employer and employee. The employer's incentives align with maximizing their surplus, whether mutual or an employer-only surplus.
Medically-informed long-term labor supply curve: However, the graphic on the right shows the new, long-term perspective that challenges this traditional employee labor supply curve belief. As explored in this article, 55 hours is the breakpoint where sleep deprivation and the risk of long-term chronic conditions increase substantially. This new information shrinks the mutual surplus space. Thus, while professional services employer incentives continue toward high employment hours worked, today's medical research suggests employees are better served working no more than 55 hours on a regular basis.
* By the way, if there is an enterprising health economics academic looking for a great thesis topic - I'd be glad to work with you to specify the shape of the employees' labor supply marginal cost curve, including externalities.
The graphic at the bottom of this section is called "The Greedy Work Impact." Greedy Work Impact integrates the greedy work economic framework with recent American Journal of Preventive Medicine research. Greedy work [v] occurs when employers' incentives, like the medical system, encourage work hours beyond the standard 40-hour work week. The negative impact occurs from sleep deprivation and the 55-hour + work week breakpoint discussed earlier. The negative greedy work impact is especially prevalent today in professional services industries, such as medical, legal, accounting, strategy, and others. Effectively, the medical system profit centers like hospitals and medical practice owners make more money when salaried people work above 40 hours per week. The greedy work incentive framework shows that more unpaid overtime leads to more profit.
"Greedy Work" is traditionally allowed by the U.S. Fair Labor Standards Act. The U.S. FLSA is a remnant of the Industrial Age and, in part, relies on the culturally-based unpaid overtime willingness of the exempt employee. In the industrial age, factory workers were considered at risk to be overworked. But their bosses, like factory managers and executives, were not considered at risk. As it remains today, the bosses are exempt from FLSA protection. Importantly, the FLSA exempts doctors and other professional services workers from workers' protections.
Fast forward to today, the information age is very different than the industrial age environment when the FLSA was placed into law. Many of today's professional services workers toil on the assembly lines of accounting, consulting, medical, legal, or other information-based factories. Is a doctor, going from patient to patient really that different than an auto assembly worker going from car to car? In terms of the impact caused by sleep deprivation, the answer is NO. Neurodegenerative disease such as Alzheimer's disease does not discriminate by occupation. By a quirk of legal tradition, the FLSA enables chronic disease discrimination. Sleep deprivation creates significant, unaccounted-for externalities. Until those externalities are accounted for, the medical system has an incentive to work salaried doctors well past a 40 hours/week. The rational medical system business manager will take advantage of the marginally free (or much lower cost) above 40-hour per week medical labor. Medical system business managers are like a "fly to the light" of marginally no or low-cost doctoring labor - they cannot help themselves.
A greedy work impact example: Jeff, one of the authors, is a client-patient of Kaiser Permanente ("KP"). KP has a unique medical services business model that vertically integrates insurance, medical, testing, and pharmacological services. Jeff experiences KP as a central "one-stop shop" for all his medical needs. Presumably, the integration provides more revenue levers and cost control to manage profitability. Jeff had a candid conversation with one of his favorite doctors recently. He asked an open-ended question: "What is it like to work here?" They answered as long as their name is not revealed. The answer received was:
"I am part-time, thank goodness. I get paid for my hours. I self-manage my benefits. The typical KP model is to dangle a decent salary and a big pension in front of a young doctor, then work them to death! It is not right. They ask me to work my patient follow-up for free. I refused. I might be leaving soon."
This is the greedy work impact in action. While not asked, research suggests the 'work them to death' salary multiple is high. Perhaps 2x or more during high volume times. The salary multiple is the actual hours worked divided by 40 for FLSA-exempt employees. This is a measure of the degree to which the employer benefits from free marginal labor costs. The higher the better for medical system bosses. The KP employee hours leverage approach is the rule, not the exception in professional services.
5. Conclusion - How to convince your surgeon to get enough sleep and policy idea thought starters
Think about these hidden sleep deprivation risks the next time you need a doctor. The best surgeon is likely one who gets enough sleep so as not to be unhealthy and perform the equivalent of drunk surgery. Unfortunately, there is no breathalyzer test for sleep impairment.
Ask your surgeon if their pay and benefits are salary or hourly-based. An hourly-based surgeon self-servicing their own benefits is likely to have more control over their work hours. More control means more capacity to properly manage their sleep.
In the absence of a sleep breathalyzer, it would not hurt for your surgeon to sign an attestation the morning of your surgery - that they received eight hours of sleep the night before and worked less the 55 hours over the week prior to your surgery. This does not seem unreasonable -- but I doubt they will sign. A system-infected doctor would not want to chip away at their own reasonable doubt defense and possibly impact their malpractice insurance costs. It is still good to ask! If they refuse to sign, please ask them if they agree with the reams of medical research studies showing that a lack of sleep leads to reduced performance for your surgery and chronic disease for the doctor. Sleep is a win/win for you and your doctor! Having this conversation in advance of your surgery, even if the doctor refuses to sign, will put them on notice of your expectation. It may help to move the needle... and who knows, maybe your doctor will get better sleep before your surgery.
Policy Ideas: This article ends with policy ideas to address: "So, what's next?" Below is a list of ideas to address the long-term hidden costs of sleep deprivation and overwork. In economics geek-speak, this is another way of saying "policy suggestions to remediate the externalities driving an upward-shifting long-term labor supply curve, but not accounted for by labor demand."
Section 4 and as supported by the appendix, provides an evaluation framework for both short-term and a medically-informed long-term view. Based on today's sleep deprivation and emerging risks associated with overworking, the labor supply curve is shifted up and to the left. As shown in the right graphic at the beginning of section 4, this has the impact of reducing the mutual surplus. But, even with a reduced surplus, the greedy work incentive for employers to increase hours worked remains. This curve shift shows that greedy work incentives are worse than we formerly believed.
In section 3, externalities are discussed as the reason why "greedy work" incentives persist. This is why professional services employers' demand is not sensitive to the medically informed long view. As a result, policy changes to help align labor market supply and demand should consider making labor supply externalities more salient to labor demand. How externalities are made more salient to labor demand is beyond the scope of this article, but next are some policy idea thought starters:
Educate -- Provide labor supply appropriate sleep deprivation medical education so they may increase their risk premia -- ask for a higher labor wage or make alternative labor supply arrangements to offset long-term costs.
Tax -- Implement sleep deprivation offset labor demand taxation. This tax would be the primary funding source for an insurance fund to enhance Medicaid or related. The purpose is to care for those impacted by long-term chronic disease costs associated with sleep deprivation or overwork.
Sleep deprivation testing -- Develop "quick tests" that identify individual impairment prior to surgery or other high-risk patient encounters. Medical personnel failing this test would be removed from risk-based patient interactions.
Regulation -- Pass consistent, nationwide laws AND implement enforcement rules to limit overworking, such as regulations associated with pilots or truck drivers.
FLSA Redefinition -- Modernize the FLSA to include professional services and client-facing salaried employees as non-exempt. This is likely the most powerful policy change tool. As shown in the appendix graphic, mandating 1.5x pay above 40 hours would cause the labor demand curve to be negatively sloped and eliminate the employer surplus. (In the sample equivalence graphic, see the gray line) It would also reduce or eliminate the employers' incentive to provide salary and benefits-based employment opportunities. Policies reducing the number of salary-and-benefits professional services workers would likely require the need to address medical insurance. Today, medical insurance is often a benefit. The need to allow people to acquire medical insurance outside of employers and for employers to provide medical contributions is also necessary for modernizing the FLSA. To this end, there are employer medical insurance programs known as Health Reimbursement Arrangements (HRAs) aligning with medical insurance and employer-defined contributions. [vi]
Accelerate medical technology evolution by reducing frictions -- Increase medical technology solution provider access to non-personally identifiable data and other research to accelerate technology improvement. In the U.S., HIPPA is a health data privacy law. It may be necessary to modernize HIPPA to enable broad and appropriate access to non-personally identifiable medical data. Client health data is also considered a competitive advantage for health providers. Part of modernizing HIPPA could include the centralization of medical system data. This could encourage changing medical system participant "competitive advantage" attitudes to "health data as a medical community utility." Like in the financial services industry, a central repository like the Credit Reporting Agencies (such as Equifax, Experian, and Trans Union) may be an effective platform to appropriately share health data. Imagine if changing doctors was as simple as giving your new doctor permission to access your entire medical history, neatly maintained in a single repository. An alternative to a centralized data repository is a decentralized blockchain. This would provide more autonomy to the individual patients regarding how their health data is shared. Another technology-enhanced friction-reducing suggestion is to increase access to offshore or other licensed medical providers via mobile technology. The purpose is to enable more cost-effective and available labor demand capacity management.
What are your ideas? -- Bring it on! I hope this article inspired you! Feel free to share this article with those that may be interested.
6. Appendix - professional services employment economics
This appendix builds out the "Greedy Work" economic framework from section 4.
Employee Labor Supply: From the employee’s point of view, they are labor supply. The sample curve is generally upward-sloping. The “quality of life” factor was deduced by an exponential factor (after a relatively flat portion near the full-time / 40hr mark). The slope is the author's hypothesis and will be unique to the individual. The following table was specified after the QoL was translated into a “required pay” by taking the reciprocal, indexed to 40hrs = 1 and QoL = 100% for Required Pay.
Supply Curve basis
With this example, an employee working ¼ time (10hrs/week) would accept 50% of FT pay. Because the curve is kind of flattish, increasing hours by 50% from FT (40 to 60) requires only a 23% pay bump, but it increases at an increasing rate. Doubling work (80 hours/week) is close to parity at +88% ReqPay, but tripling work (120 hours/week) would require more than quadrupling pay, assuming a free, informed decision by the employee.
Employer Labor Demand: From the employer’s point of view the demand for total hours is more or less fixed at a 1 to 1 parity (slope =1). That is, the hours of coverage needed aren’t really impacted by the labor market, but rather by the market for the employer's professional services. For a hospital, that’s the number of people needing medical care. For a consulting firm, it would be the partners’ ability to sell projects.
Then, the decision faced by the employer is how to supply those hours. If the employer needed 1,000 hours, they could hire 25 40-hour employees, 50 20-hour employees, or 10 100-hour employees (ignoring any constraints related to needing a minimum number of unique people on a given shift).
If they paid exactly for the hours worked, like a 1099 subcontractor, they would be indifferent between any of these options (that’s the heavy dotted horizontal line at 1.0 – “Hourly/P1”).
If they paid a flat salary, then, in theory, they’d be willing to pay, say, 2x as much for an employee working 80 hours (the red line)
If there’s overtime involved, then the employer actually does not want to work employees more than 40 hours, since it would be less expensive to more people beyond 40 hours. (the grey line)
Mutual Surplus: The interesting thing is that there is a space between P1 and the price where the “Supply/Demand” lines cross (light dotted, “Pmax”) where both the employer and employee can enjoy a surplus – space below the red line and above the blue line.
Using consulting firms as an example, employee candidates are aware that these jobs are intense (i.e., >40hrs/wk) before they start. The consulting firms can offer higher pay than employees who work at “normal” jobs to compensate. This suggests why the employees' supply curve flattens just after 40 hours.
In a sense this is a selection factor too – consulting firms are implicitly looking for employees who have “supply curves” that are amenable to the long hours. This could be fortified by the hazing effect.
The Challenge: Now, the challenge (from the employee’s perspective, anyway) is that if there is only a salary, the price is fixed upfront. If the price is fixed, employees maximize surplus by pushing for fewer hours, and employers do the opposite. The challenge (for employees) is that employers have more power than the employees.
Information asymmetry at the time of price setting. Employees know it’s bad, but employers know it’s worse than the employees think - there is a reason professional services employees have about 2x the "quits" rates per the BLS. [vii]
Potential switching costs/penalties (e.g., need the residency to get a license, unsatisfactory employee reviews leading to difficulty in securing other employment, employee fears creating change inertia, etc.)
Employers regularly "manage out" low-performing employees. This performance management activity signals employees the need to minimize their own employee surplus.
And the gradual push for more hours is possibly masked a bit because the employee had a bit of surplus/room at the original price – so at first they might feel like they were already being compensated for the hours. This "original price surplus" is like a bamboo finger trap for the employee - easy to put your fingers in, but difficult to pull them out!
"Contractor Nation" is a potential long-term outcome: Let's play this forward and perform some backward strategic reasoning associated with game theory. Assuming professional services employers are profit-maximizing and have a stable source of client demand, they will stick to the most leveraged (steepest slope) of these 3 demand curves. Thus, the salary labor demand model works, especially because after 40 hours, they can leverage labor costs across more professional services' hours. The salary labor demand model assumes 40 hours is the fixed working time needed to cover employer costs.
However, there could come a point where the employer will be incentivized to switch to an hourly model where they use subcontractors. This would be attractive if:
Employers were required to pay 1.5 x pay for overtime, like in the case of a non-exempt employee as defined by the FLSA.
Labor demand-based client demand is so uncertain that the professional services provider is unable to predict capacity needs and makes a salaried employee unattractive.
Labor supply, now individual contractors, could self-service their benefits by providing cost-effective medical insurance options outside of employers.
Labor supply wakes up to the long-term health costs and 'votes with their feet' to find jobs with more reasonable hours, including as a subcontractor. At this point, labor demand will have no choice but to move to a subcontractor model or greatly change their salary model.
As an "in-between," there may be a way to deleverage the salary labor demand curve by adding regulations to cap employee hours, without causing an exodus from benefit-paying salary jobs. However, as the labor supply curve gets steeper, as shown in the right diagram at the beginning of section 4, the long-term misalignment between the 1 to 1 salary-based labor demand curve and the labor supply curve will grow. The steeper labor supply curve encourages alternatives to work over 55 hours per week, including as a subcontractor.
Thus -- "Contractor nation" may be the most efficient (aka, game-theoretical stable) solution.
Greedy work is like an option derivatives security and 55 hours is the breakpoint: Finally, there may be an intuitive disconnect between 55 hours of weekly work and health risk. Many people have certainly worked more than 55 hours in a week. For these people, it may not have felt too terrible at the time.
The theory about the 55-hour breakpoint relates to option pricing. Conceptually, for the employer, hiring an employee willing to work past the standard 40-hour work week is more like a call option derivative financial security. In the financial world, options are derivative contracts providing the right, but not the obligation, to buy (for a call option) or sell (for a put option) some asset at a pre-determined price on or before the contract expires. [viii] For the employer, hiring a professional services salaried employee provides the right, but not the obligation, to have the employee work overtime. As long as the salaried professional services employee works for a particular employer, overtime is effectively a low-cost call option for that employer.
One of the biggest drivers of traditional options pricing is the implied volatility of the underlying security. As an analogy --> implied volatility is the employer's variability of the need for overtime work. Depending on the professional services' client needs, the professional services company may or may not need overtime employee supply. Implied volatility is often more important to understanding an option price than the other option pricing factors, such as:
the strike price cost of the option --> the costs isolated to the overtime need. Since salary has already been paid, these are marginal costs to having that person work overtime - like travel to the client, food, lodging, etc.
the time to expiration of the option --> how long the employee will be available for overtime work.
the underlying cost of the security --> the employee's salary.
the risk-free interest rate --> the next best overtime work option - since this is usually expressed as a discount rate, you may think of the risk-free interest rate as to whether it is high or low:
a lower discount rate means there are reasonably available professional services alternatives to the employee option being valued, as such, the future is worth more because of the alternatives available to deliver the professional services.
a higher discount rate means there are not many available professional services alternatives to the employee option being valued, as such, the future is worth less because there are limited alternatives available to deliver the professional services.
In the options model context, 55 hours are the minimum hours along the weekly hours' continuum where long-term chronic sleep deprivation presents as a higher risk. Based on the options pricing construct, the volatility of work hours over 55 is the essential price-setting driver. Think of 55 hours as the higher risk signaling gateway to sleep deprivation. This leads to a reinforcing hour-worked feedback loop:
The higher the employer hours volatility, the higher the option is valued by the employer. Then --
The higher the option value to the employer, the higher the likelihood that the employer will use the option at even higher hours. Then --
The higher the employer's option is used, the higher the likelihood of chronic disease for the employee.
Today, it would seem employees may be undervaluing this overtime work option. Based on medical research, employees appear to have a too high discount rate related to their future health. We provide suggestions to normalize (i.e., bring down) their discount rate in the conclusion policy ideas section.
Next provided is the mathematical specification to show how option pricing relates to salaried employees as an employer's option. The Black-Scholes-Merton option pricing model ("B-S-M") was first specified by Fischer Black and Myron Scholes in 1968. Robert Merton expanded on these ideas and refined them for pricing. It was so groundbreaking that Dr. Scholes and Dr. Merton were awarded a Nobel Prize for their collective work in 2008. (Dr. Black was deceased by then and the Nobel committee does not award posthumously.) Today, newer option pricing models are often used, but the B-S-M model remains the most widely accepted. [ix] In the following graphic, we show how the variable inputs to the model may be generalized to be a useful framework for pricing overtime salaried labor.
7. Notes:
Please find the chronic disease and sleep deprivation supporting studies in Dr. Peter Attia's book. Dr. Attia does an admirable job describing the strong relationship between sleep deprivation, sleep disorder, and chronic disease.
Attia, Outlive: The Science and Art of Longevity, 2023
Research and interpretation from neuroscientist and author Lisa Genova:
Hulett, Dreams are a window to our memories and healthy thinking, The Curiosity Vine, 2022
[i] Hebbian learning and neuroplasticity citations include:
Wu, Zenke, Nonlinear transient amplification in recurrent neural networks with short-term plasticity, eLife, 2021
Keysers, Gazzola, Hebbian learning and predictive mirror neurons for actions, sensations and emotions, The Royal Society - Biological Sciences, 2014
Mcclelland, How far can you go with Hebbian learning, and when does it lead you astray, Attention and Performance, 2006
[ii] Abbott, Videnovich, Chronic sleep disturbance and neural injury: links to neurodegenerative disease, Journal of the Nature and Science of Sleep, 2015
[iii] Thaler, Sunstein,Nudge: Improving Decisions About Health, Wealth, and Happiness, 2008
[iv] On the left, under 40 hours side is the conceptual employee's surplus. I consider this conceptual because I am not sure employee surplus exists, or exists for very long, in professional services organizations. As a former Managing Director at the accounting, tax, and advisory "Big 4" professional services firm KPMG, the firm has the technology and management systems to manage "up or out" employees that do not deliver the equivalent of at least 40 hours of work. If a consultant is "on the bench" or otherwise not billable, there may be other productive work activities, like business development, new project proposals, training, etc. Professional services companies are incented to manage all employees to the employer surplus right side of the framework. In general, they are quite good at it.
[v] I first came across the term "Greedy Work" in Claire Caine Miller's New York Times article.
[vi] Editors, Health Reimbursement Arrangement (HRA), Healthcare.gov, accessed 2023
Editors, Exploring coverage options for small businesses (HRA), Healthcare.gov, accessed 2023
Medical-defined contributions and high deductible insurance are discussed:
Hulett, Getting the Most Out of America's Sickcare System, Section 4 - A high deductible helps commit to your health, The Curiosity Vine, 2023
[vii] In August 2021, the U.S. "quits rate" reached an all-time monthly high of 2.9%. This means a straight-line annual quits rate is north of 30%. The quits rate, as stated by the U.S. Bureau of Labor Statistics (BLS) is defined as follows:
"Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs."
According to the BLS, the Professional Services industry segment has the second-highest quits rate, second to the Leisure and Hospitality industry segment. From a "Greedy Work" standpoint, I argue the two segments are very different. Professional Services has the vast majority of employees as non-exempt under FLSA standards. Thus, Professional Services employees generally do not receive overtime pay and are more subject to the "Greedy Work" syndrome. Whereas, Leisure and Hospitality employees are mostly exempt employees, so they receive overtime pay and are less subject to the "Greedy Work" syndrome. Since Leisure and Hospitality workers are often in lower-paying roles, seasonal, and more subject to the health hazards associated with COVID-19, their reasons for quitting are different. It could be as simple as the season ended so they move on to another employer in a different locality. After removing the more part-time oriented leisure and hospitality segment, professional services are about 2x the quits rate of other traditionally salaried industries.
[viii] Editors, Pricing Options: Strike, Premium and Pricing Factors, NASDAQ - National Association of Securities Dealers Automated Quotations Stock Market, 2019
[ix] Bezek, Black-Scholes-Merton (BSM) Model, Seeking Alpha, 2022