Are our markets efficient?
Gee, I have been so buried in writing proposals, I no longer have any idea of which day or week it is. Rather literally. But it is in writing proposals that we realize just how inefficient the market economy is. All these people marketing, selling, bidding, cajoling. Do we really increase the value of the economy this way? Isn’t this time wasting much like the perennial security guard at every doorway in a third world country. Doing nothing, going nowhere? Don’t you get incensed at the waste of your time? Let me explain further why it affects everyone. You, me. Our sons. Our daughters.
Flexible labor markets
You all know the concept of a “flexible labor market“, don’t you? If not follow the link to a clearly written A level crib sheet.
Flexible labor markets are based on the idea that a good market “clears”. A market is good if I can bring my tomatoes and customers come and buy them.
The price is not determined in advance. The price is allowed to change with supply (number of people selling) and demand (number of people buying). And as we all know, at the end of the day, the price can drop significantly as sellers contemplate no sale. Equally, the best stuff will sell at a higher price early in the morning.
Good labor markets
When we come to labor markets, the idea is that you and I, sellers of labor can go to the market and sell our goods, that is, our time and expertise. If there is a good market, we will be bought, when we want to be bought; and buyers will find someone to buy, when they want someone to buy.
Labor markets that you and I know
Of course, labor markets are not 100% flexible. We are blocked in by contracts. The employer guarantees to give you work and to pay you on time. You guarantee to do work and have to give notice if you want to change employers.
Rigid labor markets
Some labor markets are very inflexible. I believe in the UK, 30 years ago, if we wanted to move a telephone in a student dormitory, it would be a nightmare. Why? A telephone technician wasn’t be allowed to screw the device onto the wall. That was the carpenter’s job. If this story is not 100% accurate, then it was similar.
Not everything has changed
The “defined benefit” pension scheme also adds rigidity to the markets.
A defined benefit (DB) scheme means we pay in a fixed % of a our salary today for the right to draw a pension at a given age (usually 65) at 66% of our average of last three year’s salary (or similar calculation).
The importance to this calculation to what I am saying today is not the pension, much as it is on everyone’s minds, but that the 66% was based on an assumption of working for 40 years out of 60 for one employer (starting in your early twenties).
Here you can see the legacy of rigid labor markets that we haven’t sorted out, even in theory.
Why do systems like defined benefit pensions distort the labor market?
Implicit in your monthly donation of a fixed %, is that you will stay for 40 years. If you leave before then, you will pay a heavy financial penalty.
So most people stay. Every year, some people retire and we can replace those with 20 year olds while everyone moves up a notch. Neat?
Yes it is, BUT
. . . this model doesn’t allow for radical changes in skill. And it only works when people do retire – which they haven’t been the case with the bulge of the baby boomers. Of course now the boomers are approaching retirement, organizations running this model will suddenly need to take on a lot of young people, some of whom will not be able to get the experience they need quickly enough to replace people who are leaving.
Equally, if you have to take people on for 40 years, as an employer you may think twice. It is much more convenient to be able to ask someone to leave when you have no work for them or cannot afford to may them.
Why employers like a flexible labor market?
So employers like a “flexible” labor market. They want it to be easy to ask people to leave.
What is the payoff for us?
And the payoff for us is that
- young people are more likely to get “starter” jobs
- we should be able to move employers more easily
- the economy should be more vibrant with a better match of skills to changing conditions.
But what a muddle
The downside is that we haven’t thought this through.
Pensions and in the States, health insurance, are tied to employment. So employees are unable to move.
If employers don’t provide these benefits, an underclass of employees develops. In the trade this is aptly called the secondary labor market – cheap and disposable.
And where does this leave employees – people of working age
My biggest concern is that when a labor market is massively flexible, how do employees – that is you and me – the sellers of labour, see far enough ahead to know what to invest in?
Of course this is an issue in all business. How do farmers know how many tomatoes to plant? How does Warren Buffet know what stocks & shares to buy on the stock market?
They do it in three ways:
- They form institutions – trade associations or their own firms – to do research on markets and to influence markets through lobbying and marketing.
- They make long term contracts – e.g., agree to sell to TESCO’s at a pre-determined price
- They get better real time information on markets.
Think of third world farmers contracting with FairTrade to sell you coffee. They are doing it less for the price and more the stability of the contract.
Think of third world farmers who adopt mobile phones at the speed of light because they can find out prices readily in local and international markets.
What the theorists haven’t delivered
So why then do we assume
- Employees (you and me) don’t need information on future prices to decide how much to invest in skills today?
- Employees don’t need sane coherent contracts that allow us to complete a season. A season may be 6 months to a year for a farmer. Our investment in a 3 year degree is repayable over what period with what certainty?
- Employees (you and me) shouldn’t band together to form trade associations to research and influence markets. I know that is what unions do, sort of. I know that is what good professional associations do.
My question to you
My question today, and I hope some people can answer it, as I am a noobe in this part of the world, is
which political parties have an explicit agenda to make sure each and every person has sufficient information to make informed decisions about the investment in skill.
I don’t think governement has to make decisions about our investments for us. But it does need to make sure there is an environment in which institutions who repesent us emerge (and do their job well).
Where does a young person in the UK and the USA find out this information?Leave a Comment