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

Dysfunctional, “Disinterested” and Disenfranchised

…and some would add it is a Disaster!

The fact is that in a Digitised Economy with control as the key behavioural modification tool utilised in organisational context; the more ‘control’ and micro management we apply, the more dysfunctional, disinterested and disenfranchised employees and collaborators become.

Now the terms employee and collaborator used in such close proximity should create a slight twinge of cognitive dissonance, but do we really pick up on the subtleties of the situation? Possibly not, however this thought piece is an extension of our initial thoughts on [the Future is collaboration], publish a week ago.

Logo Open Source Initiative
Logo Open Source Initiative (Photo credit: Wikipedia)

With collaboration and an Open Source or purely OPEN philosophy to achieving value creation for individuals and society in large, the biggest ‘contractual challenge’ of the beginning of the 21st Century is the revolution in the engagement process.

No longer a process purely dominated by an HR focus, but more around our key concept of CLUSTERS OF SKILLS & EXPERIENCE.

Creating the environment and framework that supports the ability of market participants to ‘cluster’ around skills bases and then for willing procurers of those clustered skills to engage in such a market is the cornerstone of the Digitised Economy in the third wave of ‘Industrialised Revolution’. In fact the word Industrial Revolution is a disingenuous statement to make, as the third wave of prosperity should be called the DIGITAL EVOLUTION.

Open Source Media Framework Icon
Open Source Media Framework Icon (Photo credit: Wikipedia)

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))

A new Commercial Reality under Austerity

How to compete fairly and openly.  [Part of our ‘The Trouble with Innovation series 1,2,3,4,5 – Part 6]

Doing business anywhere, anytime is never easy!

That is a stark commercial reality, that most business people will accept as a given.  But how? now? does is work in a climate of AUSTERITY???

(Apologies for the blatant confusion and poetic licence taken in the previous sentence).

Public and private sectors mostly have an uneasy symbiotic relationship with each other.  If the public sector cannot deliver a solution, they have to procure it from a private provider and a private provider (generally, but not always) rub their hands with glee, as it is relatively speaking ‘easy money’ provided you meet and exceed certain framework thresholds.

All nice and cosy, when we are in a growth cycle of the economy; yet ever so tricky when those Framework Procurement Agreements come up for tender during the down slope side of the cycle…

Business Cycle
Image via Wikipedia

It is odd how the ‘staccato’ relationship between private and public sectors work at different periods during the business cycle.  And this is exactly where the public sector, with an astute “commercial hat” on, can take advantage of it’s perceived negotiating strength during the down cycle agreement drafting / tendering process.

Yet, do they take advantage of this? 

Our view is that any Public Sector Procurement Framework Agreement with private sector providers will always be a FLOOR, thereby setting the minimum expectations and requirements, without ever really driving proper continuous INNOVATION and COMPETITIVE DYNAMICS to ensure players with ‘skin in the game’ continue to understand and manage their businesses with the proper risk attitude (never mind risk appetite).  Rather than act as a (“floor price”) barrier to entry, they should act as ceiling, or rather more ‘bluish sky’ REACH or STRETCH agreements, setting the rules of the game, but not acting as the default pricing mechanism , meaning that the private sector provider must continue to be innovative, rather than wait and ‘cream-off’ the best bits whilst seeing out the agreement time period until the next time anyone bothers to ‘tamper with the height’ of the limbo bar…

Our summary take away from this article:

The Public Sector Procurement Framework Agreement therefore should act as an incentive to compete and have fair access, but never as the default pricing mechanism.

Community and Public Sector Union Pledge Signi...
Community and Public Sector Union Pledge Signing 20th August 2010 (Photo credit: Senator Kate Lundy)

theMarketSoul ©2012

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

Economics of Taxation

There are in essence only two ways of taxing citizens:

  1. A Tax on Stock (Wealth)
  2. A Tax on Flows (Income or consumption)
taxes
taxes (Photo credit: 401K)

Within these two tax methodologies are hidden the minutiae of  the tax regime system, but at a fundamental level, any tax raising authority has to look at these two options / methodologies available to them.

Now step back second and consider the tax take flows from  these two options:

With Incomes and consumption generally on the wane, where  else can the taxing authority turn for sustaining or growing their net tax take?  Only on the stock of capital  assets held by its citizens, so expect a sustained, possibly nuanced, yet blatant attack on your net wealth over the coming few years.

Vince Cable United Kingdom Business Secretary ...
Image via Wikipedia

Another salvo  was  launched again from the Business Secretary, Vince Cable, yesterday and we expect a sustained rhetoric and action in the next budget cycle.  Today, the main stream press are reporting rumour of lower the 50% rate to 45%, to encourage an inflow of entrepreneurial  and highly skilled management talent, reversing the recent drain or threat of ‘brain  drain’ from taxpayers in this tax rate band.

Tax
Tax (Photo credit: 401K)

theMarketSoul ©2011