Is Liquidity of Labor a Good Thing?
Lately I’ve been thinking a bit about the market for labor. All this thinking has led me to wonder whether the liquidity in the labor market is a good thing for organizations and the economy as a whole.
Over the past 50 years, the length of service for a specific company has been going down. Gone are the days where you started at a company in your 20’s and received a gold watch when you retired at 55. While I unfortunately couldn’t track down the data to illustrate this (let me know if you have it), the days of a lifetime of service in the corporate world are gone.
Within a given industry or field there are two types of raises, vertical and horizontal. Vertical raises are the more traditional type of advancement – up within the organization Horizontal raises occur between companies.
The rise of the internet and sites like Craigslist, Monster, and Careerbuilder have made the horizontal raise much easier to get for those who are not getting vertical raises. These sites, in essence, have created a market for labor that didn’t exist and effectively added liquidity to the labor market. By making it cheaper and easier to advertise for positions, there is an active and constant bid in the market for labor that didn’t exist before.
As we saw in the stock market in the 90’s, increases in the amount and speed of information flow in a market tends to increase liquidity and result in overtrading – and we are starting to see that in the labor markets as well. This trading has resulted in economy-wide market where labor is being rewarded horizontally rather than vertically.
There is a major information asymmetry problem with such a market design. When labor moves up the ladder vertically there is complete information. The employer knows the employee quite well and vice versa. Horizontal raises, on the other hand, have incomplete information. The prospective employer only knows what is on the the prospective employee’s resume and has incomplete information about the person. Often times someone who is unhappy that they didn’t get a raise vertically move up horizontally (and many times there are good reasons why the vertical raise was not given).
This “empowerment” of labor will be lauded by many but overall I don’t believe it is good for the economy or business in general, and in the long run labor itself.
Imagine for a minute if you had a stock that was conscious of the fact that it was being traded and needed to be traded for higher values to survive. What would it do? It would act deceptively, spread rumors about other stocks, and trick you into holding it (in fact this happens in many companies now).
Labor does the same thing. This liquidity for the labor market is resulting in many of the organizational issues problems in companies today.
When an overvalued worker is misallocated to middle management they promote incompetence to protect their “value”. Horizontal promotion increases these odds.
Why are CEO’s salaries so high? Because horizontal promotion has taken hold and a CEO has a bid in the market to be CEO of another company (sometimes in a unrelated field).
Let me know your thoughts. This was a bit of a ramble, so hopefully I got the idea out there and across.