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

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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 Inverse Relationship

Inverse Relationships
Inverse Relationships (Photo credit: Thomas Hawk)

We have always been fascinated by the Inverse Relationship between the Experience Curve and Cost.

Pure logical would dictate that (and indeed a convex demand curve) that as you ‘slide’ down the curve, the price / cost would become lower. Yet in practice, this hardly ever happens? Big Question mark…

Is this because the further we slide down the Experience Curve, the more utilitarian (fancy economic term we used there!) the benefit becomes? Yet, it also adds to the overall risk of the Experience or Value being added.

English: An example of the relationship betwee...
English: An example of the relationship between the IS-LM and Aggregate Demand curve in Economics. (Photo credit: Wikipedia)

Is this a counter intuitive argument or are we just getting plain confused by the inverse relationship?

theMarketSoul (c) 2013

DUO
DUO (Photo credit: Fabrizio Aiana (AKA trystan_o))

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

An Ownership Revolution is required

We have been following the G20 ‘get those naughty multinationals in the tax tent’ debates raging for a few months now, with amusement we have to add; here at theMarketSoul and have the following short thought piece to contribute to the debate.

We know the ‘outrage’ really is all about the what the OECD calls the ‘general erosion of the tax base’, which in our opinion is just a distraction for proper structural reforms in the western democracies contributing to the G20 and OECD coffers.

English: The logo of the Organisation for Econ...
English: The logo of the Organisation for Economic Co-operation and Development (OECD). (Photo credit: Wikipedia)

The real issue is the power of civil society structures, such as multinational corporations, versus nation states. We constantly get an earful on how undemocratic corporations are from a liberal social leftist media and how dangerous unfettered corporate power is.

Yet, multinationals are far more democratic, in both structure and performance, than any sovereign government will ever be. If the corporate governance structure is correctly set up, then every corporate entity has an annual AGM at which point the corporate leaders have to resign, on a rotational basis, depending on individual Articles of Association or Memorandum ofIincorporation provisions (depending in which jurisdiction the corporate entity ‘resides’). How often does a sovereign leader stand down, in comparison and leave it to the popular vote to be re-elected? Certainly not on an annual basis, as is the case for most corporate leaders.

Civitas Foundation for Civil Society logo
Civitas Foundation for Civil Society logo (Photo credit: Wikipedia)

This leads us to the real thought piece of this article, namely the fact that corporate ownership and access to corporate ownership should really be extended to as wide a base as possible, rather than a few ‘monied’ or opportunist participants in the market.

Legislation around employee share ownership schemes are still very cumbersome and rules, rather than principles driven.

The real revolution we require is not around a new tax base or recapitalizing democratic bankrupt nation states; however we require a revolution of democratic corporate ownership to sweep the length and breadth of the land, in order to spread the risk, add additional wealth creation opportunities (and hence a widened wealth tax base) for smaller, leaner and meaner governments to address. This a cry from civil society to the inner ‘goodness’ of political society to sit up, take serious stock and work on longer-term solutions to the erosion of their tax bases, rather than the usual headline grabbing short-termist market distorting interventions the G20 governments are so infamous.

theMarketSoul ©2013

Behavioural Consequences – The UK Bond Market Rigging Scandal

Health Warning: The UK Bond Market rigging issue is all behaviourally driven. We express a personal opinion in this post and do not endorse or condone breaking any jurisdiction’s sovereign laws.

We would like to contribute a very short thought piece on this issue. Our premise basically goes like this and is grounded in behavioural theory:

2012 Behaviour Matrix copy
2012 Behaviour Matrix copy (Photo credit: Robin Hutton)

Take away any sensible incentive (by over regulating the market participants) and you create the disincentive for cheating behaviour to manifest. Simple.

It is a natural competitive behaviour to ‘cheat’ or try to cheat a system that becomes ‘badly’ designed, as in the case of the highly over regulated bond market and an environment of very low yields.

We find is amazing that the popular press only tend to focus on one side of the equation and distort the real issue and underlying drivers that lead tot cheating behaviour.

Illustration for Cheating Français : Illustrat...
Illustration for Cheating Français : Illustration d’une antisèche Español: Ilustración de una chuleta Deutsch: Illustration zum Schummeln (Photo credit: Wikipedia)

The rule of law should be the overriding guiding principle and helping to design markets and market participant behaviours based on properly incentivised interactions is part of any regulatory system. In the recent past, we have forgotten to bear this in mind…

…and then we act surprised when market actors (participants) misbehave?

theMarketSoul ©2013

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US Treasury Yield Curves – Revisited mid July 2013

Seal of the United States Department of the Tr...
US Treasury Seal (Source: Wikipedia)

We resume our intermittent analysis of the US Treasury Yield Curves today with a comparison between the mid July 2013 versus mid July 2012 (in chart 1) and mid July 2013 versus mid July 2011 (chart 2).   US DoT Yield Curves Mid July 2013                       Chart 1 – Mid July 2013 versus mid July 2012 In the absence of any meaningful data on ‘proper’ yield curve rates, this analysis will have to do.   US DoT Yield Curves Mid July 2013vsJuly 2011 (1)                       Chart 2 – Mid July 2013 versus mid July 2011 Finally, we compare mid July 2013 versus mid July 2007 (chart 3), the last time we experienced an Inverted Yield Curve and had any meaningful Yield Curve data. Note that the short versus longer term yield rates had a much flatter yield rate curve than in the recent past.  This is partly a reflection on the risk profile of financial gilt debt instruments back in 2007 versus today.   US DoT Yield Curves Mid July 2013vsJuly 2007 Chart 3 – Mid July 2013 versus mid July 2007 theMarketSoul ©2013