Matt Nolan

A society of Entrepreneurs?

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Is that the future of the labour market, a myriad of “self-employed” entrepreneurs offering services in order to gain income – income that creates a claim on resources that are largely created by capital/machines.

This is what the “three laws of future employment” at new geography suggests to me. (ht Marginal Revolution) .

The laws are:

  1. Law #1: People will get jobs doing things that computers can’t do.
  2. Law #2: A global market place will result in lower pay and fewer opportunities for many careers. (But also in cheaper and better products and a higher standard of living for American consumers.)
  3. Law #3: Professional people will more likely be freelancers and less likely to have a steady job.

Where does this come from?  Say that a lot of the fundamental things we consume, both in terms of manufacturing and primary goods, can be mechanized extremely cheaply – with virtually no labour input.  In that case, investment in the machines and their maintenance is extremely valuable – and owners will as a result be willing to pay a significant sum (in terms of resources) to those who in turn look after the machines.

If only a very small number of people are required to look after and build the machines, then the rest of society has to move into roles where they do one of two things:

  1. Serve a secondary market of people without access to capital – say making food for their own small group of people, or making clothing.
  2. Offer a service to the owners of capital and the group of people who are looking after it.

In that case, there is likely to be a very very large service sector with a small base of labour manufacturing and primary production that is very productive/capital intensive.

Now why would we expect entrepreneurs, why wouldn’t we see massive scale in the service industry like we have in the other sectors?  Well, generally, services don’t fit the “scale” model – economies of scale do not exist in service industries, and as given the value of heterogeniety in the service industry the flexibility of small firms/entrepreneurs would be vital.  Lets not forget the internet either, which has reduced the cost of entry into service industries and increased competition.

In a situation where capital is very heavily concentrated (both in terms of physical and human capital – given that a small number of people in the service industry will also have significant talent and be able to extract far more rent than others), I see a role for significant redistribution and a minimum income in this type of environment.  As the constraint of scarcity is loosened, the idea of having a government to help ensure a minimum standard of living really becomes more important.  The question is, how far along that road are we now?

Matt Nolan

Wages and costs in December

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So the latest labour market statistics are out … and since the “quality-adjusted wage increase” (what is actually just inflation expectations) exceeded “inflation” (proxied by annual growth in the CPI) I thought people might say something about it.

I mean hell, when it was the other way around we didn’t hear the end of it – even when we pointed out why the comparison was weird, and why there were specific one off factors behind the shift.

Now the data is out, its been 30 minutes, and all I see is this and this.  Nothing wrong with what they’ve said per see (although it would be nice to point out that the wage increase is for a fixed quality and quantity of worker) – but if they were so keen to make it sound like New Zealander’s were getting poorer before, why not say they are getting richer now.  At least be consistent right … 😉

Update:  Ahh but this happens everywhere right.

Matt Nolan

Prices provide a signal, not a cause

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Over at the always awesome Stumbling and Mumbling blog (seriously, I could write a post about every single post this guy has done) the question is asked regarding whether society should set a “maximum wage”.  While he says that such a policy can be justified in theory he states the following:

My point here is that high CEO pay is not the disease, but the symptom – of the fact that CEOs have too much power. Treating the symptom is not sufficient, and might even be counter-productive.

I would note that, in terms of thinking about “excessive power” we need to ask ourselves about the framework that business works within.  Large businesses will be subject to waste, empire building, asymmetric information, and organisational issues – but just because there are issues does not mean that anything can be done to improve them, it may just be the way things are.

The key point is that an “excessive wage” just like a “price” that is “out of whack” is a signal, a symptom, of some underlying issue.  It should be a call to try and understand how the allocation of resources is working in the market, and whether any issues exist, not a call to arbitrarily mess around with prices.

Matt Nolan

Why fear labour market globalisation?

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While reading Rates Blog today I came across the following statement:

7. Training your replacements – The next wave of globalisation is going to hit service sectors in developed economies that have previously been immune to outsourcing to the likes of China or India.

First the manufacturing sectors in America, New Zealand and Australia (Toyota laid off 350 workers there yesterday) were gutted. Now the services sectors face being cleaned out.

The first batttleground we are seeing across the Tasman is in financial services. The media there is up in arms about layoffs in banking as some of the big banks outsource IT services and accounting to India.

This could come here too. It has already happened in chunks of Telecommunications (tried ringing Telecom’s Philippino O18 staff lately?) and will eventually spread to the likes of IT, banking, medical services, media, insurance and legal services. The growth of the Internet is accelerating this shift.

My response?   So, in the same way that they’ve lowered the cost of manufactured goods, subsidised them, and done all the work making them – they are now threatening to do the same with the service sector.  So they are offering to do all the work for us?  Sweet deal!

There are two things to keep in mind with all this:

  1. There may a concern that if they make everything we will make nothing!!!  But this is a false dichotomy – in truth, if they can do these things at a truly lower cost, and decide to do it in an environment of free trade they have a comparative advantage and so prices will adjust to ensure that both they and us (with whatever we have a comparative advantage in) are better off.  Now, if they are intervening to do this through subsidies it does not mean we are worse off – as their choice to subsidise is implicitly a transfer to consumers (us).  The people who truly pay are the tax payers in these other countries.
  2. It is possible that, as globalisation in labour markets gets underway, we experience stagnant or even lower wages in the Western world.  However, this is because people who are currently STARVING are now getting the opportunity to pull out of abject poverty and consumer some resources.  Globalisation of labour markets will reduce global income inequality, improve the lifestyles of the worlds most poor, and increase the size of the “economic pie” – this is a great thing.  As a result of this we may see a hollowing out of the middle class in developed countries in the near term – so what.  We could make the argument that the middle class that was artificially holding up their claim on resources by restricting the ability of the very poor to get themselves out of poverty – when we frame it that way does your opinion about what is “morally right” change 😉 [Good post on this sort of issue on Money Illusion]

While reading Rates Blog today I came across the following statement:

7. Training your replacements – The next wave of globalisation is going to hit service sectors in developed economies that have previously been immune to outsourcing to the likes of China or India.

First the manufacturing sectors in America, New Zealand and Australia (Toyota laid off 350 workers there yesterday) were gutted. Now the services sectors face being cleaned out.

The first batttleground we are seeing across the Tasman is in financial services. The media there is up in arms about layoffs in banking as some of the big banks outsource IT services and accounting to India.

This could come here too. It has already happened in chunks of Telecommunications (tried ringing Telecom’s Philippino O18 staff lately?) and will eventually spread to the likes of IT, banking, medical services, media, insurance and legal services. The growth of the Internet is accelerating this shift.

My response?   So, in the same way that they’ve lowered the cost of manufactured goods using outsourced companies including Mexico manufacturing, subsidized them, and done all the work making them – they are now threatening to do the same with the service sector.  So they are offering to do all the work for us?  Sweet deal!

There are two things to keep in mind with all this:

  1. There may a concern that if they make everything we will make nothing!!!  But this is a false dichotomy – in truth, if they can do these things at a truly lower cost, and decide to do it in an environment of free trade they have a comparative advantage and so prices will adjust to ensure that both they and us (with whatever we have a comparative advantage in) are better off.  Now, if they are intervening to do this through subsidies it does not mean we are worse off – as their choice to subsidise is implicitly a transfer to consumers (us).  The people who truly pay are the tax payers in these other countries.
  2. It is possible that, as globalisation in labour markets gets underway, we experience stagnant or even lower wages in the Western world.  However, this is because people who are currently STARVING are now getting the opportunity to pull out of abject poverty and consumer some resources.  Globalisation of labour markets will reduce global income inequality, improve the lifestyles of the worlds most poor, and increase the size of the “economic pie” – this is a great thing.  As a result of this we may see a hollowing out of the middle class in developed countries in the near term – so what.  We could make the argument that the middle class that was artificially holding up their claim on resources by restricting the ability of the very poor to get themselves out of poverty – when we frame it that way does your opinion about what is “morally right” change 😉 [Good post on this sort of issue on Money Illusion]
jamesz

A lesson in economic forecasting

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Peak oil will be here any minute now…

Matt Nolan

A note on redistribution

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There is a point to keep in mind following the state of the union address in the USA.

We may believe that more redistribution is required to meet/maintain our social contract.  That is fine.  We may believe that more redistribution is “morally right”.  That is fine.

But lifting taxes in of itself isn’t redistribution.  The higher revenue from taxes must then be passed on to the poor – providing it directly as a transfer is the most obvious way.

Having the government lift taxes, and then arbitrarily use it for “industrial policy” or some other pet project is not redistribution – it is a large institution taking advantage of its position to waste other peoples resources for its own sense of pleasure.

If society wants redistribution it should get it, but this implies higher benefit payments (or policies that increase equality of opportunity directly) not just higher taxes.  It involves actually redistributing income, not taking it and pissing it in the wind.