Categorized | economy

The Post-Employment Economy Part 2

In my first post about the post-employment economy, I talked in general about the transition between the employment economy of the last few decades and what the post-employment economy is gearing up to look like. In this part, I want to talk about how seductive wages, as opposed to earnings, are, and I’ll start with the controversy brewing in Washington D.C. over the leadership of Michelle Rhee as the D.C. Chancellor of Schools. Rhee, the founder of The New Teacher Project, which, despite perfervid opposition by teacher’s unions, has recruited more than 10,000 superior quality teachers to public education, opposes tenure and supports merit pay for excellent teachers. Not surprisingly, teacher’s unions uncompromisingly oppose any change to the tenure system even if it means substantially higher salaries. In a quote I want to focus on here, one teacher’s union representative preferred tenure to a salary increase becase “job security is a substantial financial benefit, far greater than even a huge salary increase.”

Now, I’m very well-versed in economics and have spent the last several days researching this question of the financial benefit of job security. And I can’t find any major economist who has tried to quantify “job security” versus “wage” in the sense of how much “wage” a worker is willing to give up for “security.” If you see a wage as a small chunk of the value that a worker adds to whatever economic activity his company is involved in, then that trade-off really matters.

In the last two decades, job security has waned considerably, but wages have more or less remained stagnant. That can, on the one hand, just produce a bad deal for more people; on the other hand, the worsening of the “job deal,” so to speak, has spurred greater individual entrepreneurship. Here’s why (warning, some pretty heavy stuff ahead) . . .

The proper way to think about wages and job security (or any other benefits) is, to my mind, the way one would think of any other consumer preference. In other words, job-holders really are more like job-consumers than they are like, say, investors or capitalists. Which means that, if some economist were serious about this, they could construct indifference curves charting a marginal rate of substitution of wages to job security.

Put in simple terms, people “consume” jobs for money, money-like benefits (such as health insurance or a 401K), purely psychological benefits (job satisfaction), and money-like psychological benefits (like job security). Like all consumers, job-holders often have to compromise on one benefit in order to secure another.

How much people are willing to give up in money and money-like benefits just to get job security is, as far as I can see, something that hasn’t been quantified. When Michelle Rhee says she would like to phase out tenure in the D.C. school system in exchange for merit pay, there’s nowhere she can turn to get a dollar amount that can persuade unionized teachers to give up the job security of tenure. As I said above, if there were some economic study of public school teachers as “consumers” of their jobs, a study that tried to construct an indifference curve showing the marginal substitution rate between “salary” and “job security,” Rhee might have something to start building on.

That’s why, by the way, Rhee, as much as I worship the ground she rocks on, is going to fail.

Taking a long view, the economy of the last seventy years or so has managed its phenomenal growth by converting the bulk of us into wage-earners (the American economy of 100 years ago or more was primarily an economy of small business owners). The primary promise of the employment economy has been job security. Workers traded higher wages for job security which allowed companies to capture ever higher amounts of a worker’s productivity in wages.

This worked extraordinarly well as long as companies could make more money off of workers relative to their wages than they lost by not having a high degree of flexibility in their labor force. Just as I’ve seen no economist attempt to quantify the value of job security to the worker, I’ve seen no economic study quantifying the cost of job security to companies who offer it. And not just the dollar cost of retaining workers in an economic downturn, but opportunity cost, reorganization costs, etc.

Whatever the value of job security to the worker, globalization and other economic and technological innovations have made the cost of job security too high for employers. So we’ve seen the American employment dream, which was founded on job security, go slowly south. Meanwhile, wages relative to the cost of goods and services have more or less remained stagnant for the bulk of wage-earners.

That means the trade-off between job security and wages has become over the last couple decades a worse and worse deal.

Which means we’re slowly moving to a different way of working. As jobs become less and less secure without offering more money in return for the greater uncertainty, more people are going to try to capture more of the value of their ideas, their creativity, and their labor in the marketplace itself. If you’re a secretary and you’re getting both a crummy paycheck and constant worry about the security of your job, why not go into business for yourself as a virtual assistant. Companies are willing to pay more for a virtual assistant because it allows them the flexibility an employee does not. In other words, a manager or business owner can only rationally pay a virtual assistant three times or more what they pay an employee because the cost of having an employee that’s difficult to remove is higher than the extra cost of a virtual assistant.

In fact, a company may be willing to pay more for a virtual assistant than an equivalent employee. Why? Because the “virtual assistant” may, in fact, be three, four, or seven other people with multiple skill sets. Virtual assistant A is a whiz-bang at transcription whereas virtual assistant B is the cat’s meow at desktop publishing. Having one employee, who can never reproduce this comprehensive skill set, may cost less, but will also lose money in mistakes and possible lost revenue. In other words, “flexibility” has a dollar value to a company in terms of revenue (most companies make a serious error by considering employees to be a “cost” — the proper way is to think of how an employee produces profit).

Again, no economist as far as I know has quantified the revenue and profit value of flexibility. How much more is a company willing to pay to have a high degree of labor or skill flexibility?

But this is extraordinarly important. We have several phenomena colliding all at once. We have the slow dying of the employment dream as companies try to pursue cheaper and more flexible labor alternatives. At the same time, the globalization and technological changes that are driving this change also make it possible for individuals, who otherwise would have spent their lives as employees, to capture more if not all of their value in the international marketplace.

We’re in transit now to a post-employment economy, but where are we going? There’s a saying I made up (I think I made it up, I’m not sure) to make myself sound wise: “If you don’t know where you’re going, when you get there, you’ll be lost.” We’re surrounded by books on entrepreneurship and solopreneurship, but what does an entrepreneur world look like?

More in the next part.

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One Response to “The Post-Employment Economy Part 2”

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  1. […] Part two of my post-employment series zeroes in on the erosion of the employment promise, but I come nowhere close to saying it as well as Hacker and Jacobs: Increased income insecurity has occurred alongside slow (or no) income growth for all but the richest of Americans–among the well-educated as well as the poorly educated. In that same period, middle-class incomes barely grew at all, and what little growth did occur came only because families were putting in more hours of work. And what did they get in return? Less predictable paychecks, less comprehensive health insurance, less secure retirement savings, all adding up to family finances perched on the brink. The risk-reward trade-off looks more like a risk-reward rip-off. […]


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