A society of Entrepreneurs?

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?

Rising inequality as a result of falling scarcity?

Via Marginal Revolution, there are a number of interesting slides discussing changes in skills, demand for skills, and wage inequality.  Further investigation brings to light a very awesome paper that discusses a standard model that shows wage inequality with different skills, how to estimate it, and where some shortcomings are.

In conjunction with our knowledge of what the data regarding the “top 1%” really means, this adds credence to the view that recent technological advancements that replaced semi-skilled labour has been a primary driver of changes in income distributions around the world.

What do I mean here?  Think of it this way, people are rewarded for their skills based on how relatively scarce the service they are providing is.  Say there are three types of labour service, unskilled, semi-skilled, and skilled.  If technology creates a cheap way of replicating semi-skilled work, and if workers in a certain category have the ability to function in any market below their skill cap, this improvement in technology would reduce demand for semi-skilled workers (due to them being substituted), increase demand for unskilled and skilled workers (due to the improvement in technology increasing “income”), and increase the supply of unskilled workers (as people who are semi-skilled are pushed to move into the unskilled labour market).

As a result, this technological improvement has the immediate impact of increasing relative incomes for the most skilled making wage income inequality greater.

Now these price signals are important, as they give people an idea of what skills to develop, and what industries they should move too.  However, in turn we can make a social argument for what falling scarcity implies that we should have greater income redistribution.

Furthermore, if rising income inequality is the result of improving technology it is far from the “end of the world” type scenario some people are painting – in truth we are all benefiting significantly from improvements in technology and falling scarcity for many goods and services, the benefits of this improvement are just accruing more to some than others.

Global youth unemployment, why?

Arnold Kling raises the issue that youth unemployment has risen disproportionately during the recession.  He raises three stories and says only one makes sense – his third story:

  1. Sticky wages,
  2. Shift in demand/technology
  3. His PSST story – where it is taking time for entrepreneurs to utilise labour/match skills following a structural shock.

This is all well and good, but there is a massive story missing here.  Young workers require training, and have no prior experience with which to base their quality on – they are a “risky investment”.

Firms pull back on investment during times of uncertainty and distress, as a result we would expect to see youth unemployment rise disproportionately around the globe.

That is why its always made sense to me to have skill training as part of any unemployment program, so that an unfortunate recession that leads to the exclusion of part of the labour market only has a limited long-term impact – without this type of intervention we run the risk that the young people suffering from misfortune today have permanently lower income as a result!

Youth minimum wage and youth outcomes

One question I’ve been receiving a lot during presentations is “what is the cause of the really high youth unemployment rate”.  I have been answering with two things:

  1. The youth minimum wage was significantly increased, making young people more expensive (but also making more young people want to participate in the labour market)
  2. A recession disproportionately hits the young, as they have less human capital and can be seen as a more “risky investment” then other labour types.

I usually go on to say that I can’t say which factor is bigger – I would need someone to do empirical work.

Luckily for me, the work has now been done.  The Department of Labour commissioned a report by Dean Hyslop and Steven Stillman which went through these issues.  Now these guys are top draw, so I’m pretty comfortable just stealing their results 😉

Read more

Workers are different

It is true, and yes it is obvious … however, just because it is obvious doesn’t make it a useless fact – in truth it is an essential, and oft ignored point to keep in mind.  As raised here (ht MR):

Those of us who actually work in industry and are involved in large engineering projects of the type the stimulus was designed to ‘stimulate’ could have told you this without waiting for a study. We tried to. No one was listening.

It is maddening to hear ‘workers’ talked about as if they are interchangeable – Oh, a whole bunch of home construction workers have been layed off? Don’t worry, we’ll build a road or a bridge and employ them!” The only problem being that the type of construction home builders are trained for has nothing to do with bridges.

This is an undeniable fact – and is something that it is important to keep in mind when discussing labour market dynamics.  Now, the article goes on to say that only Austrain economists look at this issue – I call bull on that, there is a whole bunch of literature on heterogenous labour in labour economics, during the recession New Zealand economists have constantly talked about job mismatch (an understanding of that is one of the reasons why any stimulus spending has been more targeted), and the only reason it is often not modelled explicitly is because it can be hard to describe/make the model solve.

Even in the most general and non-detailed areas of applied macroeconomics, economists often use empirical models with some sort of implied labour market friction that is meant to proxy the mismatch – not a perfect solution, but definitely an indication that it isn’t being ignored.

In fact, I’ve been reading a lot of commentators in NZ discussing the areas where skill shortages still existed in the middle of the recession – in this country policy analysts, economists, and humans all seem to have a good understanding of the differences in labour and the value of human capital … maybe this is just an issue that NZ is more informed on.

Beauty and brains

It is well known that beautiful people earn more, which goes some way to explaining Matt Nolan’s success in his stage career. What is apparently more difficult to understand is why they earn more. A paper tries to split out two effects: productivity and discrimination. For instance,

…lecturers who are viewed as better looking receive higher instructional ratings by their students. Then, ceteris paribus, these higher ratings translate into higher salaries, because US university administrators pay attention also to teaching quality in setting salaries. However, the question remains on whether students are simply discriminating against ugly professors by reacting to an irrelevant characteristic, or if they do really learn less from them.

The researchers find that the additional wages of lecturers are due to productivity gains rather than discrimination but what confuses me is the difference between the two! The wording implies that productivity gains are independent of discrimination when, really, it is just a different form. Read more