I don’t want to rehash old debates, but, like anyone, I have my hobbyhorses and preoccupations. Christine Hauser has summarized the new jobs number and they’re terrible. Work disincentives, Casey Mulligan’s central focus, are no doubt playing a role, but I’d like to offer a quick sketch of some broader issues.
(1) If we embrace the Speedup Thesis, virtually all employed Americans are working harder for longer hours.
(2) But we know that there has been a huge divergence between the tradable sector, where we’ve seen robust increases in value added per worker, and modest increases at best in the nontradable sector.
(3) Moreover, per Michael Mandel, productivity in the manufacturing sector reflects the globalization of the supply chain, i.e., adding low-cost inputs manufactured abroad. So some of the productivity increase in the tradable sector does not reflect domestic productivity advances that we’d expect to be reflected in compensation levels.
(4) Think about office work. There are certainly people who work in offices who feel engaged throughout the work day, and who don’t consume leisure during those hours. Yet my guess is that the modal office worker is productively engaged for some fraction of the time she or he is in the workplace. To some extent, this is an inescapable aspect of creative work, per Paul Graham’s observations on the “Maker’s Schedule“:
Most powerful people are on the manager’s schedule. It’s the schedule of command. But there’s another way of using time that’s common among people who make things, like programmers and writers. They generally prefer to use time in units of half a day at least. You can’t write or program well in units of an hour. That’s barely enough time to get started.
When you’re operating on the maker’s schedule, meetings are a disaster. A single meeting can blow a whole afternoon, by breaking it into two pieces each too small to do anything hard in. Plus you have to remember to go to the meeting. That’s no problem for someone on the manager’s schedule. There’s always something coming on the next hour; the only question is what. But when someone on the maker’s schedule has a meeting, they have to think about it.
For someone on the maker’s schedule, having a meeting is like throwing an exception. It doesn’t merely cause you to switch from one task to another; it changes the mode in which you work.
Of course, not all office workers who consume a considerable amount of leisure during the work day are best understood as makers.
Successful organizations tend to grow. Revenue per employee tends to fall. As organizations grow, the degrees of freedom of the typical employee tend to decline — your freedom of action is limited by that of your superior, and her freedom is in turn limited by her superior. Tim Lee has written on this theme a number of times, among others.
In some environments, hiring additional personnel becomes a kind of Veblen good. We can afford to throw more bodies at a given problem, and so we do. This practice is growing less common in the private sector as firms are subject to more rigorous financial discipline. Corporate governance doesn’t work terribly well, which is why we have things like the Microsoft-Skype deal. But then we have David Einhorn calling for Steve Ballmer’s head. In the public sector, in contrast, the public appetite and the teacher’s union drive for smaller class sizes can be met in flush periods. But the private sector economy still accounts for the bulk of jobs. And the decline in the number of “inessential” employees reflects the (mostly beneficial through the lens of productivity) rise of the Einhorns of the world.
(5) This is why it is so damn frustrating when people say, “Hey, Barack Obama has been great for the private sector economy. Check out those huge corporate profits!” Huge corporate profits reflect product markets that are not sufficiently competitive. Product markets become less competitive in economies defined by high barriers to entry, including costly labor market regulations. This isn’t about President Obama. Rather, it is about the accretions that happen in any stable, affluent society.
The corporate profits misconception reminds me of Ashwin Parameswaran’s illuminating ideas on micro-fragility:
The Crony Capitalist Boom-Bust Cycle: A Tradeoff between System Resilience and Full Employment
Due to insufficient exploratory innovation, a crony capitalist economy is not diverse enough. But this does not imply that the system is fragile either at firm/micro level or at the level of the macroeconomy. In the absence of any risk of being displaced by new entrants, incumbent firms can simply maintain significant financial slack. If incumbents do maintain significant financial slack, sustainable full employment is impossible almost by definition. However, full employment can be achieved temporarily in two ways: Either incumbent corporates can gradually give up their financial slack and lever up as the period of stability extends as Minsky’s Financial Instability Hypothesis (FIH) would predict, or the household or government sector can lever up to compensate for the slack held by the corporate sector.
Most developed economies went down the route of increased household and corporate leverage with the process aided and abetted by monetary and regulatory policy. But it is instructive that developing economies such as India faced exactly the same problem in their “crony socialist” days. In keeping with its ideological leanings pre-1990, India tackled the unemployment problem via increased government spending. Whatever the chosen solution, full employment is unsustainable in the long run unless the core problem of cronyism is tackled. The current over-leveraged state of the consumer in the developed world can be papered over by increased government spending but in the face of increased cronyism, it only kicks the can further down the road. Restoring corporate animal spirits depends upon corporate slack being utilised in exploratory investment, which as discussed above is inconsistent with a cronyist economy.
Micro-Fragility as the Key to a Resilient Macroeconomy and Sustainable Full Employment
At the appropriate mix of exploration and exploitation, individual incumbent and new entrant firms are both incredibly vulnerable. Most exploratory investments are destined to fail as are most firms, sooner or later. Yet due to the diversity of firm-level strategies, the macroeconomy of vulnerable firms is incredibly resilient. At the same time, the transfer of wealth from incumbent corporates to the household sector via reduced corporate slack and increased investment means that sustainable full employment can be achieved without undue leverage. The only question is whether we can break out of the Olsonian special interest trap without having to suffer a systemic collapse in the process.
Just absorb this and the world will make much more sense. My guess is that Ashwin and I would have very different ideas regarding how to tackle the crony capitalism problem and barriers to new entrants. But this is the place to look.
I really want to live in a world in which center-right types would say, “Yes, enormous corporate profits are a bad thing — they’re bad because they’re a symptom of crony capitalism. The solution isn’t to tax away profits and use them to expand an inefficient public sector. Rather, it is to facilitate exploratory innovation by reducing barriers to firm entry.”
(6) Back to employees. Why did I write that column about O-Rings and A-players, which I shard with you in this post? A really, really good worker is worth some positive number X(an average worker).
First, let’s assume you’ve already bought into the “When Good Isn’t Good Enough” philosophy of always trying to hire A-players because they are just so much more productive than B-players (an ‘A-Player’ by definition is incredibly productive and smart and has that ‘it’, that rockstar-esque factor that makes everyone want to work with her). That means you won’t settle for people who are good but instead hold out for people that are great.
Great people – the A-Players – are a very different breed from the good (B-Players) and mediocre (C-Players). Great people are more likely to be employed with a company since a great person is often over 3 times as productive as a good person. Joel Spolsky argues in Smart & Gets Things Done that an A-player is anywhere from 5-10 times as productive. Joel looked at coursework data from a Yale computer science class and found that the fastest students finished their workload as much as ten times faster than the slowest students (average was 3-4 times faster).
In troubled economic times, anyone can get laid off, but a disproportionate number of layoffs tend to fall on C-players. This is because they are the lowest performing people in a company and there generally are more C-players at a company than any other caliber. …
Some A-players are less likely to be looking to jump ship during tough times due to a risk adverse profile, security, financial reasons, or other reasons. They are happy where they are and more likely to hunker-down in tough times. On the flipside there are A-players that are MORE likely to leave. Tough times often paint companies into a corner and force them into maintenance mode rather than continuing to innovate. Great players love to innovate and usually NEED to innovate. It’s usually very hard to keep these type of A-players caged-up and thus this presents a big opportunity for recruiting.
Think through this for a moment. If some A-players are more footloose, firms will have to do something to retain them — give them more engaging job functions or, most straightforwardly, pay them more. See what’s happening here?
Let’s face it, these great, A-Player type people are just really hard to find. Let’s say for sake of argument that A-players make up 1% of the population that could do the job, B-players are 19%, and C-players comprise the other 80%. It’s uncertain if these percentages are accurate, but there definitely are more C-Players than B-players and more B-players than A-players.
And I assume that these numbers will vary from field to field. But look: if firms in knowledge-intensive services want to form all A-player teams, because that is the key to being superproductive, these firms are going to pay a lot more, they’re going to create valuable services, and they will use pay-for-performance because they must to retain talent.
When a C-player works harder and longer hours, she gets less done when an A-player works harder and longer hours. When a bunch of A-players work harder and longer hours together, they get better faster.
(7) So what the hell does this have to do with employment? I mean, we know that not everyone is an A-player. But what about the jobs in leisure and hospitality?
Well, where do we really need jobs in leisure and hospitality? In this realm, we also have a distribution of A-, B-, and C-players and there are firms in the leisure and hospitality and food service space that are comprised of all A-players and that do very well.
A question worth asking is whether the outsourcing of household production has plateaued. Affluent two-earner families eat more prepared and restaurant meals, etc. But given the bleak employment landscape, have we seen a marked increase in the hiring of more in-person service workers, e.g., greater reliance on personal concierge services, etc.?
These jobs are really tough to fill, because they involve bringing people into intimate environments. There is a cultural chasm separating upper-middle-income households from potential workers living in culturally isolated communities that are not well integrated into thriving metros through good, accessible transportation options. Moreover, the market-clearing wage for these jobs might be quite a bit lower than the social wage, i.e., it might be worth $12 an hour for workers on the margins of the mainstream economy to society as a whole — it is good to keep people engaged and employed, to help build the noncognitive skills one needs to climb the jobs ladder, etc. Yet it might only be worth some fraction of that to the person doing the hiring at a given quality of service provided.
(8) So this is roughly where I come down on the long-term question: we need a program of deregulation, tax reform, sharply raising productivity in the public sector by attacking public sector cartels, and, more controversially in my camp, much more investment in well-designed work supports. I would want to see deep cuts in entitlement spending and a shift to spending on work supports, like wage subsidies aimed at making the labor market more inclusive. These work supports should be person-centered and not place-centered.
Why work supports and not demogrants or other cash transfers that would be more inefficient to administer and that would risk less in the way of creating work disincentives? Because the thorniest problems of our labor market are identity-driven. Demogrants represent a potential injury to identity while work supports reflect an ideal of inclusive economic citizenship.
(9) None of this precludes the fact that we need to reform the financial system. Rather, it is a (tentative) way to think about how to make the pieces of a fragmented labor market fit together in a more constructive way.
(10) Re: the public sector job losses: keep your eye on resistance to compensation reforms that might have preserved jobs by paring back expenditures per worker.
(11) Wage subsidies can be understood as a second best solution, with the first best being eliminating various labor market distortions, e.g., minimum wage laws, licensing restrictions, etc., and leaving it at that. Making some progress on this front is essential, but I’m not sure it will be enough given the way rising affluence translates into a constantly shifting baseline for what constitutes a decent social minimum.
A friend and I were just talking about how a high poverty rate in a city like New York and Los Angeles can be interpreted as a good sign. Poor people live in cities because that is where they find economic opportunity. If housing becomes unaffordable in dense cities, and if the less affluent move to areas that where they are isolated from potential employers or are forced to spend more on transportation, in money or time, income insecurity will presumably rise, with attendant impacts on health, etc. A collective inability to tolerate visible inequality thus contributes to a form of population-shifting that increases stickiness at the bottom of the economic ladder.