Flexible Labor Markets and Inflexible Bills I: The Big Picture
There is an inflection point between how we manage our lives and what the ideal economic environment is as it relates to employment. Well, maybe conundrum is a better description. Specifically I’m talking about our culture and the concept of flexible labor markets. A flexible labor market, a truly flexible labor market, is a dream of the libertarian capitalist. In its purest form, it has no restrictions on employment and the employer can do whatever they want in response to the business needs. This means no minimum wage, no labor rules, no mandatory health care unless the employer wants to offer it. Employers can hire when they need people and fire when they don’t. There are very few examples of a pure flexible labor market but some markets are more flexible than others. There are some real positives to this for an economy, and that’s why economists love the fact that the USA has one of the world’s most flexible labor markets. The challenge is in that our culture, including our employers, thrive when there is very steady employment. This catch-22 is not the only one with a flexible labor market, but it may be the biggest.
First let’s look at what a flexible labor market is. Most of what I’m going to refer to in this article is from the economicshelp.org website. From reviewing the site, It seems to be a great resource which provides some of the basics of economics for anyone who wants to know more about it. According to the site, a flexible labor market has the following traits:
- It’s Easy to hire and fire workers.
- Labor is occupationally and geographically mobile.
- Government intervention does not distort the market.
So let’s go through just these points. Starting with the big one where in a flexible labor market it’s easy to hire and fire employees.
As I’ve often ranted, the world is moving ever more to one where steady payments, preferably under contract, is becoming the norm of existence. We can see it everywhere. In entertainment, which has mutated from separate pay as you go items like purchasing music on tape or disc to subscriptions from services like Spotify and Pandora. With video, there is also the transition of paying for a movie ticket or a video game to streaming and subscription services. You can see it in the largest ever tech acquisition in history, as at the time of this writing, Microsoft is buying Activision for nearly seventy billion dollars. The primary motivation behind the acquisition is to boost it’s Xbox Live streaming service and truly turn it into the Netflix of games, i.e. it’s a must-have service, including a must-pay monthly payment for anyone who plays video games. We’ve seen it for some time with hardware, with Apple and Samsung phones all intertwined with cell carrier contract plans.
This concept isn’t new. I remember in my earliest days of selling computer systems to mom and pop car dealers, I would pitch them on monthly lease payments which ended with a $1 buyout at the end. In theory they would purchase another system after that lease payment was over keeping their hardware and software as just a permanent monthly cost of doing business. Leasing and regular service contracts have been the norm for the private sector forever. What is new is how this mentality has shifted to the consumer. Initially the monthly payments were only for debt service on homes, cars, and lines of credit. Now it’s everything and every business is trying to turn their product into a monthly payment. Even Toyota is trying to get into the monthly payment game with a fee to use their cars digital keys after a certain date and even Panera Bread has a monthly coffee service.
Businesses, from an investors point of view, are simply supposed to be machines that make consistent and reliable profits. Wall Street likes regular dependable revenue. It makes sense that businesses can better provide a regular stream of profits if they can manage to have regular expenses. To that end they have adopted the services model for expenses wherever possible. Now they are trying to shift their customers to that model as well, also wherever possible. The problem is that businesses are the source of the revenue that consumers use to buy goods and services. So they want to have people, when they are in the role of employees, working and collecting a paycheck, only when they need them, but they want people, when they are in the role of customers, to have regular income. If you look at this from the level of an entire economy it doesn’t quite match up. It’s not realistic to think that as soon as someone gets fired from a job they can immediately get hired somewhere else. The average transition time is 3–6 months to get a new job. That’s three to six months where there is no income available to pay those monthly bills. In theory we could argue that workers should plan for this and save accordingly. The reality is that unemployment is designed to be far far below what people need, and let’s face it, people are very bad at saving for ups and downs of life. Did I say bad? I meant horrible, terrible, and every other negative word in the dictionary. It’s one of the dumbest things ever to think that any economy based upon consumption will also have a large portion of the population automatically be wired to save for the ups and downs in their career. Some can do it for sure, but the majority? Absolutely not!
The second point about Labor being occupationally and geographically mobile means that you can take people and easily move them to the place you want to move them to, and have them do the jobs you want them to do. Let’s start with geographically mobile, and the big issue with that. The best way I can describe this is to relate a conversation I had with several community and education leaders who went on a two week Junket to Mexico. The goal was to learn more about Mexican culture as these community leaders worked in a community where there was a massive Mexican immigrant population. One of the biggest takeaways for the community leaders was that they learned the immigrant population didn’t focus on work opportunities when they were relocating. The first wave did, they moved from Mexico to where the jobs were. Over time their friends and family joined them. The goal of the individuals inside these further waves was to be with family first and the employment opportunities was a minor consideration. So if there was stagnant job growth in an area, say only a single large employer who was at capacity, it wasn’t part of the immigrants calculus. The Mexican families would continue to import family members with the idea that they would figure it all out later. This leads to a large population of workers and no available jobs. Although outside the scope of this commentary, there are many issues when a community encounters this sort of scenario. The important point for this narrative is that this story demonstrates the challenge of a geographically mobile workforce. With geographically flexible staffing, employers only wish to move employees, and only employees, on an as-needed basis. But most people want to live close to where they have friends and family. Yes, there are tons of mobile professionals, but I’m not talking about the specialists who will happily take a job on the other side of the country to accelerate their career. I’m talking about rank and file laborers, the kind that make up the bulk of the workforce in any economy. No matter how big a new auto plant is and no matter how much opportunity it offers for workers in Tennessee, if an extended family unit has roots in eastern North Carolina, it will be next to impossible to lure those workers over.
Being occupationally mobile is just as challenging. Most workers don’t wish to continually change careers throughout their lifetime, especially if that career change includes comprehensive retraining. The challenge is the gap between leaving the old job and being properly trained for the new job. I’ve seen this issue time and again. The employers want employees ready on day one and they only want to pay for skills that exist within the employees on day one. They are, for the most part, not willing to give people the livable wages during anything resembling an extended training period. Let’s say that brand new factory in Tennessee needs hundreds of machinists. It takes two years to be a properly trained machinist. No individual who’s working in the services sector and making 45–50K a year will be willing or able to support themselves to get retrained. Very few, if any, employers are willing to foot a bill to pay and support someone for two years if they aren’t contributing to the bottom line. Of course they aren’t going to do that because it’s a flexible workforce! What company in their right mind would pay someone 50K a year to live, possibly with full benefits, and pay for their training when the employee can walk the second there is a better deal? It’s the double edged sword of the flexible workforce. Employees can go where they are needed the most, and that means they could cost a company 200K in wages and training, and walk to the next company the day their training is completed. Yes, programs like this could include contracts that require payback if the employee doesn’t stick around but getting that money back is difficult. There is also the timeline of need. What if the market goes soft and the company that needed 200 machinists now only needs 100. Assuming they had the recruiting / training program in place, they just paid twenty million dollars to train up those 100 machinists only to not need them any more. As I said, The total of that recruiting and training is a bit north of twenty million, and that outlay without a guaranteed return is too much risk for most companies, especially smaller companies. In both cases of geographic and occupational mobility, the desire of the employers and the economics inherent in a flexible labor market is at odds with what it takes by an employer to make it happen. Right now that risk has shifted to the employee and that model clearly isn’t working. That risk, in aggregate, could be shifted to a different entity, i.e. the government, but the third aspect of a flexible labor market gets in the way.
Not too long after the industrial age started changing the world, governments wound up getting involved in labor markets and over time they became involved in a big way. It’s not surprising then that overtime entrepreneurs and most of the people involved in running businesses tended to skew to conservative antigovernmental attitudes. This happened in line with government involvement. By its very nature, government involvement will distort a market. As I recall my anthropology lessons from college, a big point made was that the act of observing a culture can inherently change the culture being observed. Even if you have a pro-business government, it will still distort the market. Any labor issue that the government tackles including working hours, overtime, wages, benefits like healthcare, etc, even if the laws exist in favor of business, still adds structure. That structure changes much more slowly than business changes. Eventually some of even the most pro-business legislation becomes a hindrance to business. For business to exist and grow, you need structure, as soon as there is structure, there is an impediment to business. It’s another catch-22 and another reason why Flexible Labor Markets are challenging.
Looking at labor, if the government creates a business friendly at-will employment environment, then organizations can easily fire employees in a downturn. That results in less consumers as many workers aren’t receiving the pay that allows them to have all those subscription services that businesses are adopting. This makes the downturn worse. If the government steps in and creates friction for an employer trying to reduce staff, then people will stay employed, and keep spending money allowing the economy to continue. But the businesses in question won’t be able to be as efficient.
I think the big picture really boils down to this. Economists and business owners love flexible labor markets, until they don’t benefit from it. As more and more parts of the economy have businesses structured around regular payments, then more and more businesses will struggle as the labor market becomes more flexible, and conversely, will benefit when the labor market becomes less flexible. There always needs to be some flexibility as economies change over time. That being said, it’s a bit like the kid who asks for three deserts. You may want to be careful what you wish for, because if you get it, you’ll wind up with the business equivalent of an upset stomach!
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