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.

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  1. Justin

    Two thoughts: If the horizontal raise was powerful wouldn’t wages have risen overall in the last 10 years significantly?

    Mobile labor is very powerful – Silcon Valley exploded due to this very American force. Where mobile is immobile you end up with places like Detroit.

    The reason behind the dramatic growth in CEO pay are multi faceted but mostly reflect rewards to non CEO’s becoming much higher.

  2. Ross

    You should think about the implications of employee sponsored health insurance in promoting illiquid and immobile labor markets. For example, say an employee is not getting the expected vertical raise. The perils of leaving a position and forfeiting the employee sponsored health plan cause outsize risk to the employee and their family. So they may stay in a position which they may be overqualified and under compensated.

    Health insurance is one of the greatest frictions in the labor market. If insurance was portable, you would be free to seek upward mobility in the labor market without as much risk. Labor should be free to find its highest return in our society, same as we allow with capital.

    • zerobeta

      I agree re: Health Insurance. I that our current health care system makes US labor too expensive to employ and would be a great thing for business in this country.

      Labor should be free to find its highest return on capital, but not its highest capital cost. If all labor does is maximize how much its paid it may destroy capital by making it less productive than it can be.

  3. zerobeta

    Thanks for the comments.

    1. I would argue that wages would have fallen even more. I don’t think that’s a valid argument becuase there were other forces such as global wage arbitrage pushing US wages down.

    2. I agree that a mobile labor force is powerful, and I think it can thrive in an economy and corporate organizational structure than what we have. I think Silicon Valley has thrived because they are smaller and thus don’t have the huge corporate bureaucracy that horizontal raises exploit.

    3. Of course there were other reasons for CEO growth. But in the past there wasn’t such a huge “trade” in CEO’s like there is this day. These days the CEO is a profession, and there is a bid for a certain CEO in the market when his expertise and success in a certain firm or industry may not necessarily translate to another firm. I don’t think this is a good thing.

  4. Anonymous

    One question you haven’t answered is why does the horizontal change pay off. Especially given the informational asymmetry involved. Given the asymmetry, we would expect the horizontal move to be discounted relative to the vertical.
    I suspect it’s because 2 main reasons:

    1. The employees are allocated to where they’re needed or appreciated the most (pretty much like any investment of capital in a free market) – which is a good thing, right?

    2. The employers discount in fact vertical moves because they rely on employees preferring not to move horizontally as this raises all sorts of problems (health insurance being one of them, but also having to prove your worth when starting from scratch, having to learn new things, the stress of a new start, professional inertia) – and I think that’s wrong on the part of employers and a lot of them pay the price for that by losing a lot of the tacit knowledge and the informational advantage

    • Zero Beta

      You raise some interesting points. I think there are other forces that definitely need to be investigated like overall employment conditions (supply of jobs versus demand for jobs).

      1-I think employees are matched up with capital. In a market where labor is scarce this could lead to employees simply matching up according to top wages or capital cost, which I don’t see as a utopian free market allocation where everyone wins. I see it more like a market for lemons.

      2- This is an interesting point that I need to think about a little more.




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