The Kuznets swing and the market for labour and skills

You must have seen the headlines recently? British wages falling sharply in real terms versus our EU brethren…

We wrote about a particular economic phenomenon referred to in this post about economic cycles and particularly the Kuznets swing; which we find the most interesting and thought provoking cycle. The reason for this is that it is a generational cycle, only lasting or more accurately stated lasting anywhere between 15 – 25 years.

Image representing oDesk as depicted in CrunchBase
Image via CrunchBase

So where are we on this cycle and what does it mean for me, should be the two most obvious questions to answer?

Lets address both separately below.

Firstly we believe we are now around seven years into a downward phase of the Kuznets cycle, therefore to some analysts it would mean that we are either almost half way or to others around a third of the way through this cycle.

Secondly, and more importantly, the impact it has on market participants like all of us:

We believe that the downward phase of a Kuznets swing is the ‘exuberance‘ correcting phase; when markets and other factors of productions contributing to mostly normal market clearing activity ‘got slightly out of kilter’. The Kuznets swing is always there to bring these factors of production into alignment. It is a consolidation phase of the cycle and interestingly for this particular phase, it coincides with disruptive technological advances around Cloud Computing, dis-aggregation of intermediaries, especially in labour markets with labour or skills exchanges appearing everywhere.  Examples include, Elance, oDesk, PeoplePerHour, etc..

English: Cloud Computing
English: Cloud Computing (Photo credit: Wikipedia)

Furthermore, and this is the most import action point for our readers to understand and appreciate, this consolidation and technological advance has a severe impact of wages levels and the distribution of where actual ‘work’ is being performed.

Hence headlines like the one we spotted this morning regarding real wages in Britain declining relative to other (very unproductive EU cousins) are not helpful without the pundit exploring and engaging n deeper analysis of the underlying drivers for the pressure.

The Income and Substitution effects of a wage ...
The Income and Substitution effects of a wage increase (Photo credit: Wikipedia)

Our recommendation:

Understand that the world of work is changing much faster than we had ever become used to in previous generations. As active able and willing participants in this market for labour and skills we have clear choices: Up-skill, be competitive appreciate and plan for volatility in the labour supply market, by ensuring flexibility in location, skills and prices. It is especially painful to suffer real wage declines, but remember this is the market’s subtle way of signalling a problem or challenge in that particular market and a way of adjusting in order to restore the natural balance and clearing prices.

We believe every interfering politician and educating commentator should always bear this in mind.

theMarketSoul ©2013

Tags:

Pony ponderings…

Have you ever overheard a small debate between children related to #economics? Some at theMarketSoul (c)1999 -2013 find themselves in Spain this weekend, relaxing with family and the following conversation between young siblings are worth repeating.
In some bizarre way, it relates to labour economics and the minimum wage:
Pony
Pony (Photo credit: Moyan_Brenn_BE_BACK_IN_SEPTEMBER)
We had just observed a single horse drawn carriage in the streets of Marbella, when the conversation kicked off.
C1 “What is the minimum wages?”
C2 “I don’t know, why should I?”
A1 “It currently is around €7.00 / hour or something very close”
C1 “Ok, so if one apple costs say €1, then the pony should get 7 apples an hour for working, right?”
C2 “Why?” [by the way C1 is 13 years old and C2 is 11 years old”
C1 “Because that is the minimum wage”
C2 “That doesn’t make any sense!”
C1 “What do you mean it does not make any sense, it is simple mathematics?”
C2 “Why should the pony get 7 apples per hour? What if it only wants 3 apples and something else?”
C1 “Because that is the minimum wage!”
C2 “Yes, but the pony might not want so many apples. The pony might want to choose for itself how many apples it wants”
C1 “Now you don’t make any sense to me at all!  The pony should get exactly what the minimum wage is, or more”
C2 “But the pony might not want or need all those apples. It might need fewer apples, but want more oats or something else. The pony should choose and not someone else…”
And thus we had a little insight into an economic debate between the ‘social cohesion’ leaning child and the ‘libertarian’ leaning child. No fisticuffs or bad mouthing, but different opinions and different attitudes to life. It will be interesting to listen into another conversation along these lines.
With a binding minimum wage of w the marginal ...
With a binding minimum wage of w the marginal cost to the firm becomes the horizontal black MC ‘ line, and the firm maximises profits at A with a higher employment L . However in this example the minimum wage is higher than the competitive one, leading to involuntary unemployment equal to the segment AB. (Photo credit: Wikipedia)
We agree with C2’s questions on where the choice for the minimum wage really lies. The wage level should be determined by the provider of the labour, whether individually or collectively bargained, but there should be no interference from government in this process.
Take note Europe, this is just one factor contributing to your long drawn out decline. Markets, not quasi-markets and constant political interference and distortions in the markets; should determine clearing prices or wages.
But this seems to be a lesson a child can learn, but not grown up political leaders…
theMarketSoul ©2013

The Future is Collaboration

The future of work and engagement has already begun. That is stating the blatantly obvious, but are we really prepared for it, yet?

A Spinning Jenny, spinning machine which was s...
A Spinning Jenny, spinning machine which was significant in the beginning of the Industrial Revolution (Photo credit: Wikipedia)

Here is a little taster of what we think the future of work will look like for most individual participants in the labour and skills supply market.

The key is that the industrialised ‘factory’ and production line models are now slowly but surely falling apart. The expectation for grown up individuals to turn up 5 days a week and sit at ‘battery hen‘ cubicles and perform tasks a ‘production line’ manager allocates and oversees are numbered.

The slow revolution was unleashed in the third industrial revolution or rather the digital age revolution at least 20 years ago when personal computers become more prevalent. We wrote about this HERE.

This image was selected as a picture of the we...
Clusters (Photo credit: Wikipedia)

The fundamental problem today is that no one has yet effectively resolved the ‘contracting’ and hence TRUST problem of delivery on a large scale. We can do it effectively on the micro level, with freelancers selling there individual skills on small tasks and projects, where the risk of failure or an adverse outcome is mitigated. However, we have not yet evolved far enough up the trust hierarchy to fully outsource mission critical projects to ‘clustered’ skills and solution provider hubs, in remote and distant locations, far removed from the core.

Some of the critical inhibitors are these:

  • Immigration policies
  • Commercial legal frameworks
  • Fiscal constraints

Some of the important contributors are:

  • Digitisation and speed of the Internet
  • Platforms where suppliers and demanders of services can be matched
  • A common global business Lingua Franca

These are only a few of the factors either contributing or detracting from moving the revolution on in significant leaps and bounds.

Therefore, to conclude this first stab at a look at the future world of work, we hypothesis that the future will have large groups (what we will call CLUSTERED SKILLS HUBS) of skills pools bidding for contracts to supply services and solutions to leaner and meaner multinationals in cross border transactions and flows that are worth trillions of dollars annually.

Right now, we can’t see any major G20 sovereign government dealing effectively with this challenge, to ensure that they contribute and facilitate the move towards the new future of COLLABORATION.

theMarketSoul ©2013

The Economics of Social breakdown

How do we define the state of our nation at the moment?

For a little while now we have been experiencing an ‘unease’ with the communication revolution and the disparate nature of communication tools at our disposal. On the surface it would appear that what is happening is that rather than bind together a society it is having exactly the opposite effect.

The recent riots in the UK is just a small manifestation of this general unease.

From a purely economic and dispassionate analysis of the situation, we would offer the following opinion:

We don’t have a ‘broken society‘, as is such an often uttered phrase, but rather a complete misunderstanding of the disconnect between our ‘old / slow business models’ and the pace at which technology moves and changes the rules of engagement.

The pace of change in organisational design, planning and execution models lags multiple-fold behind the pace of technological advancement. It almost has an exponential relationship and due to this factor, we have not yet come to grips with applying new technology to ‘old world’ thinking, with its checks and balances and control mechanisms.

The disconnect between the pace of the communication revolution and the nature of diminishing returns has led to a massive gap in appreciating the fact the occasionally we have to pause and reflect on where we are and where we want to be.

Both the continuing economic crisis, pace of change, realisation that the future does not hold the same promise and prosperity as the recent past; are all infliction points that have amplified and spilled over into anger and the violence of the past few days.

So what we have is a ‘broken understanding’ of how different factors of production, such as land, labour, capital, enterprise and innovation has drifted further apart and caused unnecessary and unsustainable concentrations of accumulated power and risk amongst differing population groupings in the UK and elsewhere.

Remember, all five of these factors of production listed above need to work in harmony, in order to add, create and manage value and output that are useful and life sustaining necessities for all citizens.

Let’s address the gap between political and civil society to ensure sustainable progress and development for all.

theMarketSoul © 2011

Short-sighted: Actor behaviour in the market for competitiveness

Competition is a good thing.  Of that we are sure.

It is one of the key ingredients of a dynamic market process, yet is competition and the potential negative consequences of short-sightedness a means or an end in itself?

Today we argue that the unfettered aspiration of competing for competition’s sake and the shedding of what is seen as non-core processes and competencies in organisation, will eventually lead to sub-optimal performance and is an unsustainable practice.

In the unrelenting search for shareholder value creation, which is the fiduciary and main responsibility of the board of any shareholder / equity owned organisation, we believe that sub-optimal decisions are being taken, both because of target operating model enhancements and short-term return of investment (ROI)

 

One of the underlying objectives of International Harmonisation of Financial Regulatory Standards (as currently promoted by the IASB & FASB) is the desire for greater transparency and ultimately more regular and frequent reporting cycles.  The view is that the greater the frequency in reporting, the less information asymmetry will be in the market, thereby eliminating insider trading and other undesirable ‘sharp’ market practices that regulatory bodies such as the SECLondon Stock ExchangeNYSENASDAQ, DAX, etc., are trying to stamp out.

 

But if we extend this logic, or rather shorten the current reporting cycles from the regular quarterly updates to say monthly, weekly , daily or even hourly updates, the already short-sighted mentality will become even more sharply focussed.  And this begs the question:  “How will CEOs and other business leaders have to ‘defend’ their decisions on a minute by minute basis under this unrelenting 24 hour news and sensationalism culture”; thus leading to an even more intense short term focus on their part.  Certainly, this must be the worst of all downward spirals and tyranny of information overload?

 

But, by logical extension, this is exactly where we are heading in a decade or two’s time.

 

So, if the focus is then on more short-term results and ‘core processes’ where does this leave the current wave of outsourcing, off-shoring or near-shoring of non-core processes?

 

We contend that the already well established trend of ‘letting go’ of all non-core processes and competencies has a negative effect on the longer-term sustainability of the organisation.

Succession planning could already be outsourced and thus not on the board’s agenda, as recruitment consultancies now fulfil the non-core ‘attraction of suitable candidates’ services, with the traditional Human Resources fulfilling a more Risk mitigation / management functions of ensuring compliance with Health & Safety Executive , employment law, equality laws, etc.

 

Another unintended consequence is the fact that because organisations more and more frequently utilise professional specialists to deliver projects and programmes, the esprit d corps is disappearing from organisational life.  It is difficult for managers to gain this motivational force of esprit de corps when they are managing ‘virtual teams’ and a cadre of temporary service providers through dysfunctional processes of ‘on-boarding’, induction, project management, quality control, motivational traps, engagement, focus, etc.

Therefore, to conclude this opening article in a new series around the ‘new labour market models [1] [2] [3], currently being practiced in the western free market democracies, let us ask the key question that is one of the foundations of the factors of production in achieving economic advancement:

“How do we recognise, incubate, nurture, develop and sustain talent and talent management in our organisation, when this critical activity is handed over to outside consultants who have a different business model and agenda to our corporate ambitions?”

We know that there are some ‘labour supply aggregators’ or forward thinking recruitment consultancies that realise that their own models of engagement has to change, in order for them to move into the value creation and value addition space, but there are still far too many ‘factories’ with conveyor belt mentalities out there.  Not to let the corporate ‘talent managers’ off the hook, because if you don’t have people and processes in place to manage the talent anymore, you only have yourself to blame when the ‘transparency machine’ of financial regulatory reform forces you down the channel of short-term decline…

 

theMarketSoul ©2010


The trouble with Innovation – Part 3

In this part of our discussion regarding Innovation, we want to turn the focus to the UK market place and some unsung heroes, some tirelessly working in the trenches, others ‘fishing in the ocean of opportunity’ at the moment, not being ‘on assignment’.

We are referring to Independent Consultants and Senior Interim Managers.  How exactly they fit into the innovation debate will hopefully become clearer very soon.

And the main issues and theme we need to explore is that of Trust.

Part of the challenge most Independent Consultants and Interim Managers find themselves facing is the fact that engaging assignments and workflows don’t always flow or fit together.  The challenge is that when on assignment, they are not feeding or seeding the pipeline enough for when the current assignment ends and when the assignment has ended, their next role or project might be weeks of months away from coming to fruition.

There is in effect no clear matching of supply and demand in the market place, as most assignments and engagements are won on relationships and not pure experience, skills and competencies.

That is particularly true if you ‘swim down the narrow channel’, by this we mean only follow one strategy in procuring your next assignment; which generally means you speak mostly to Executive Search or other Recruitment Consultancies.

It is in this area that we feel very little positive innovation and engagement has occurred over the last few years.

Now we acknowledge that the internet has potentially speeded up and shortened the entire recruitment cycle significantly, however, is this innovation or just advancement?

Our assertion is that the internet was pure advancement, not innovation in this sector.

It is furthermore our belief that most searches and matches occur on a pure issue of timing and serendipity alone.  There is no effective clearing house to match skills to needs in a way that clears the market effectively and efficiently.  For this we evidence a report commission by ExecutivesOnline in September 2009 (see ExecutivesOnline Interim Management Trend Update) in which it was found that 48% of Interim Managers where ‘Not on Assignment’ as of September 2009, the euphemistic phrase for being out of work.  If there were such a ‘clearing house’ the unemployment rate amongst Interim Managers and Independent Consultants would have been  markedly lower, but probably higher than the national Unemployment rate, due to a variety of other  socio-economic factors, including luxury factors such as choice, to mention but one.

Sustainability and risk management and more specifically innovation in these two critical business management areas are what we desperately lack at this key juncture in our economic cycle.  We will address these two themes in further in future articles.

To conclude our assertions made in part 3 of our exploration on the trouble with innovation is that now there should be an opportunity created to more effectively match supply and demand in the labour market.  However, there is a fundamental disconnect between public sector and private sector and permanent and temporary work.  This statement is a blatant generalisation, however public sector and permanent employment does not conform to pure market driven principles, where tenure is protected, to some extent, from external market forces.  On the contrary many an independent consultant has had to contend with the shock of a new equilibrium and have realised that to ‘stay in the game’ they have had to adjust their prices downward, sliding back down the supply curve, in order to try and find the intersection with the demand curve.  An oversupply of consulting and interim management talent has ensured that the market clearing price for services have been adjusted markedly lower, than was the case before the credit quake of 2008 – 2009.

So what we are looking for is innovative new business models that will ensure the exploration of a new and sustained equilibrium and market for talent and talent matching in the future.

theMarketSoul ©2010