Flexible Labor Markets and Inflexible Bills III: Where Government Steps In

It’s the dream of nearly all entrepreneurs and economists, the idea of a truly flexible labor market. They can get employees when and where they need them and only when and where they need them. But like many things in life the ideal isn’t possible without tradeoffs. In my first article in this series, I made the point that there is a catch-22 for employers built into flexible labor markets. Employees are ultimately the population that makes up the customers of nearly all businesses. If employers are hiring and firing at will, then there is less consistency in customers’ incomes. Businesses want regular and predictable cash flow, and you can’t have that unless your customers have regular income as well. Yes, I know that economies are very complex and layoffs in one area may not directly affect a specific business’s operations. I’m really talking in broad strokes and I know that sooner or later something that impacts one part of an economy will impact other parts. The second article was a bit of a deeper dive into the characteristics of a flexible labor market. It made the point that just like for the employers, the more flexible a labor market is, the more it’s filled with tradeoffs for the employees. In both articles, the specter of government involvement, although usually seen as a negative by businesses, is argued to be both a positive and a negative. This final article takes a deeper dive into the facets of government involvement in labor markets. It talks about what kind of legislation economists believe is needed to facilitate a flexible labor market and where they mostly get it right, and some of the areas where some of the points made are a bit flawed.

First let’s look at some of the policies to increase labor market flexibility. Like the first and second articles in this series, most of what I’m going to refer to in this article is from the economicshelp.org website. Like the six characteristics of a flexible labor market, there are six policies that are supposed to help increase labor market flexibility. They are:

Policies to increase labor market flexibility

1. Subsidized childcare provision — increases the incentive for women to work.
2. Increased spending on education and training
3. Reducing the power of trades unions and minimum wages
4. Making it easier to hire and fire workers.
5. Subsidies to enable people to move around the country
6. Building more houses to reduce the cost of renting and make it easier to move.

I was surprised when I reviewed the six recommended policies to enhance flexibility in labor markets in that I agreed with the majority of the points. Not all to be sure, but many of them. What was ironic to me is that most of the policies seemed like half sentences. You’ll see what I mean by that as we go through each one.

The first policy recommendation calls for subsidizing child care so that more women are incentivized to go into the workforce. It also incentivizes women to have more children which is a good thing, economically speaking. Talk to any economist studying the economies of first world countries, and they will tell you a universal issue is the slowing birth rates. More births is generally seen as good for long term health of an economy as it means more workers and more consumers. The missing piece of the first policy recommendation is the single word: “Comprehensive”. Kids get sick, kids have special needs that take a ton of time. Childcare needs to take this into account as it’s so regulated now, every single sniffle sends a kid (and ultimately a working parent) home. Child care is limited to 12 hours a day and usually is only available during working hours even though many jobs are 24/7. Some women, a technical majority in my personal experience, want to stay home and raise children and don’t want to go into the workforce. I think that drive is a mix of biology and deep seated culture, none of which policy can change. Others drop out for a few years and kill their career progression because of their child rearing sabbatical. Some want no children. The challenge here is that moms who go into the workforce need tons of flexibility. Employers want consistency out of their workers. From someone who spent about a year’s gross wages on childcare before my kids hit school age, I naturally think that fully subsidized child care is a good thing. I’m sure I’m in the minority when I say that I think it’s a good thing for stay at home moms to get it as well as they need a break and it will motivate them to have more kids. I think it needs to be available 24/7 for people who have jobs with odd hours. I think there needs to be subsidized in-home care available for when child care in a day care setting doesn’t work. Basic subsidies will allow some women to go back into the workforce. Comprehensive subsidies will allow many more women to go back, and stay in the workforce to the point where they can have the same career progression as men. Still, even with the most comprehensive, and expensive, subsidized child care policy, you will never get full employment out of the population of mothers. There will always be a large subset who just wants to stay home with the kids and I don’t think anything will ever change that.

The second legislative framework for increasing labor market flexibility is increasing spending on education and training. I have very strong opinions on this as I worked in a government grant program focused on education and training for many years. The biggest issue, outside of paperwork, was supporting the worker through retraining. Our system of elementary school to high school to college works pretty well for the initial training. It’s the retraining needed for a flexible labor force where we run into problems. As I’ve said in many earlier articles including some in this series, it’s hard to get retrained in a new industry if you have all the life demands of a mid-career professional. Mortgage companies don’t like stopping payments for three or four years.

Ironically we even have the framework for this, it’s called apprenticeships. At present, we are still mostly working under the old model of apprenticeships where they are targeted at industrial jobs and require a cohort of apprentices. A true apprenticeship model requires both an education requirement inclusive of minimum class sizes, and a partner employer who has needs for hiring groups of skilled labor. Unfortunately this is not really the world we live in. Today most jobs, at least those in the knowledge worker sector, are one offs that require understanding of a niche business function. We need a new apprenticeship model that pays mid-career employees a livable wage to work and learn simultaneously. The first year or two may be full schooling. As an example, in my case, I wouldn’t mind going back to school to become an Artificial Intelligence expert or a nurse practitioner. I have the technical skills to understand both jobs and both are in high demand. Both would require years of schooling and I’m not willing to give up my current income or take on debt risk to meet the demands of the economy. If I could join a company as an AI apprentice, or a nurse practitioner apprentice, I could see myself committing for the next five years to be retrained. Ironically, this would be much less expensive for the companies who are hiring. Assuming supply meets demand, then the 100K salary of something like a business intelligence developer would go down to 70–80K. Assuming i’m half productive while i’m being trained, and I was getting a salary of 50K a year, it would take three or four years of subsidy to get me trained up, and then another three or four years to get that investment into me paid back via lower salary they have to pay me because the jobs are in less demand as the population of people who can do the jobs is growing. So six to eight years, and then the company is profiting by having an internal apprenticeship program. Even today, at my age this is a good deal for any company willing to look at an 8–10 year investment cycle. Until we change the structure of what makes an apprenticeship, this one won’t happen.

Next on the list is something I’ve discussed in the second article in this series. It’s the desire on the part of flexible labor market advocates to have a policy that limits the power of unions and minimum wages. I’ve already discussed how unions are a bad idea in that it’s a solution for a problem from a past century. Equity is the modern solution. If workers are on the board of directors and hold a substantial equity stake in the firm, then everyone benefits. Regarding minimum wages, I’ve never understood why they weren’t pegged to inflation. I have always attributed that to the fact that politicians like something to campaign over, and if you take minimum wage off the table because it takes care of itself, then that’s one less thing to get your core voting block all fired up about.

A legislative policy that makes it easier to hire and fire workers is not a problem, if there is a substantial transition program in place. It really should be “A legislative policy that makes hiring and firing workers easier through strong workforce transition programs.” So how do you know what that looks like? By observing years of buyouts and commensurate layoffs, I have come to a simple solution. If the worker is in just as good or better a place financially by getting laid off, then you are on the right path. I’ve espoused having two months severance for every year worked as a compensation plan for professionals. The money would have to be put into the hands of a very stable third party in case the firm fell on hard times. This would work great for transitions, and going back to the worker training conversation, it would be ideal for a worker who wants to switch careers to better meet the demands in the greater economy. If you know a workforce is mostly ok with being let go, then firms who determine they need layoffs run into less friction.

The other side of being easier to hire and fire workers, i.e. hiring, is fairly simple. Eliminate healthcare and retirement from being the responsibility of firms and make sure the employee doesn’t lose either in the transition. You still need to have these societal constructs, just disconnect them from the employer. By doing this you completely take away much of the non-skills related friction in hiring someone. If an employer needs someone, they put out a job order, pay cash, and whatever taxes they need to pay and keep the individual as long as they need to. For every dollar spent on wages an additional X% goes into retirement, healthcare taxes, and the job transition bank. The second they don’t need the worker, they seperate. The worker goes on their merry way knowing they have a huge runway to transition and they aren’t losing any retirement or healthcare. If we do it right, the worker just has a single number that is given to the employer and the employer cuts two checks, or makes two deposits as the case may be. One goes to the employee, and one to some third party firm that manages the employee’s taxes, healthcare, retirement and transition and training accounts. If every worker had a third party to manage this stuff, hiring and firing would be a breeze and firms could concentrate on building their widgets or providing services.

The fifth point about subsidies to encourage people to be geographically mobile doesn’t work even if you throw tons of money at it. This is because people like to stay with their people, i.e. their friends and families, especially after they are later in their career and have put down roots. This is also becoming more of a moot point as there is data infrastructure for knowledge workers to do their jobs from wherever they wish to. I’ve only ever seen universal relocation subsidies work in the military and that was simply because the entire culture is built around supporting workforce geographical mobility.

The final point about workforce mobility has to do with housing, specifically, policies to encourage building more houses to reduce the cost of renting (and owning) and make it easier to move. This is very tricky to do as housing policy is usually more local than national. Local homeowners always vote to limit supply because that keeps their homes more valuable. In theory, the federal government should step in and come up with regulations to roll back or limit housing rules, encourage Multi-dwelling-units (MDU’s) and create an economic framework that encourages housing starts. But even if they did that, it will only make housing more accessible and affordable, it still won’t have too big of an effect on the mobility of the labor market because of the aforementioned tendency of people to like to stay put for reasons other than their career.

The idea of flexible labor markets has always been interesting to me, it’s why I wrote these articles. In a perfect world envisioned by economists, then employers would have the workforce where they want, when they want them, and for only as long as they need them. Most importantly, they would not shoulder the financial burden of that flexibility. Nearly everything envisioned for a truly flexible workforce is possible, but it’s not cheap. If we look at workforce flexibility like an upgraded feature on some product, then we all know you usually pay more for additional features. It’s because there is additional materials, additional engineering, and additional support needed for advanced features. All that comes at additional costs which have to be made up for in the asking price. If you want a policy that allows for more on-demand training, someone has to pay. If you want subsidized child care, someone has to pay. Ultimately, no matter what function of flexibility within the workforce you want to enhance, there is a substantial cost associated with it. Who pays for that?

When I think about all these articles centered around having a flexible labor market, I think about the story of the Hare & the Tortoise. I envision the businesses as wanting to zig and zag back and forth wherever they want like the hare. They are trying to take advantage of the moment as quickly as they can. Yet mostly everyone, including the businesses, does better if the workforce makes progress in a slow, steady, and protected way like the tortoise. Maybe that’s what a flexible labor market is, it’s simply a modern day fable. Unlike the fables of old, the fable about the truly flexible workforce doesn’t really have an end, at least not yet. I guess that’s what makes something as obtuse as labor markets so interesting in the first place.

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