Can you invest in a trend?

 

The trade-off between hiring higher-skilled and less-skilled workers

Firms differ in the skill compositions of their labour forces because higher-skilled labour is not always the most profitable type of labour to hire.

A profit-minded firm seeks low costs per unit of labour. In truth, nothing is expensive or cheap. This is because buyers will keep buying until the marginal cost equals the marginal benefit. The next unit was not purchased because it wasn’t worth the cost. The last unit was bought because its cost just matched its benefit.

The most cost-effective labour is the labour with the lowest ratio of wages to output. Low cost per unit of output is the goal whether it is comes from low wages or high labour productivity (Lazear 1998).


The wage spread between high quality and lower quality workers is large enough such that no employer hiring lower quality workers can profitably switch to hire higher quality recruits and no firms hiring high-quality workers will switch to hire lower quality recruits (Lazear 1998).

Employers will buy more of an under-priced skill until the returns to labour equalise again across different skill levels and the hiring of any more of the hitherto mispriced skill is no longer profitable because of rising wages.

Firms of all sizes will revisit their skills strategies when market conditions change if they hope to survive in their new circumstances.

Ronald Coase on monopoly as the default explanation for perplexing business practices

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Creative destruction alert: whatever happened to the Microsoft monopoly?

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Creative destruction alert: Google and the collapse of US newspaper advertising revenues

via http://www.adweek.com/news/press/us-newspapers-make-40-billion-less-ads-today-2000-160966

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The Attack on Concentration: Yale Brozen (1979)

windows

There is a distinction between controlling the supply of a product and producing or selling most of the supply of a product.

“Dominant” producers who sell a major portion of a product’s supply usually have no control over the supply. They have no power to set any lower level of industry output and a higher price than that which would prevail in a market with many suppliers and no dominant firm.

Usually, a dominant producer is the most efficient firm in the industry. Its large output is the result of its efficiency in supplying the market. The market price is as low as it would be with many producers frequently lower.

Any attempt by a dominant firm to restrict its own supply and increase price after reaching a “dominant” position simply results in the expansion of output by other firms, the entry of additional firms, and loss of its dominance. A dominant firm can keep its dominance only by behaving competitively.

The fact that there is a dominant firm, or small group of firms, in an industry is evidence of competitive behavior not of monopolization.

shipments

via The Attack on Concentration: Newsroom: The Independent Institute.

Richard Epstein on the essence of progressive economic thought

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Creative destruction in the music industry

Music Industry

Music Industry

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The Uber effect

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Monopoly or superior efficiency – Google and all that

https://twitter.com/EconBizFin/status/539937864234958851

HT: Jeremy Thorpe

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Richard Posner (1986) opines on comparable worth and commercial reality

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Alchian and Demsetz define the classic capitalist firm

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Million dollar taxi licenses under pressure from Uber at last

Technology IPOs

Some economics of zero hours contracts – part 1: concepts, definitions and initial puzzles

Unions say New Zealand employers are following trends overseas and adopting zero hour contracts: workers have to be available for work, but have no hours guaranteed. Unite Union national director Mike Treen said:

McDonald’s, KFC, Pizza Hut, Starbucks, Burger King, Wendy’s – all of the contracts have no minimum hours, and so people can be – and are – rostered anywhere from three to 40 hours a week, or sometimes 60 hours a week, and it depends a lot on how you get on with your manager.

No official figures are available on the number of people on zero hour contracts in New Zealand, but they are are available in the UK in the chart below. About 250,000 workers in the UK work on zero hours contracts.

These workers agree not to work for anyone else, but are not promised regular work at all with their new employer.

The question that must always be asked is why do people who are deemed competent to vote and drive cars sign zero hours contract? What is in it for them? David Friedman asked this question about the economics of restraint of trade agreements for employees:

…the employer who insists on an employee signing a non- competition agreement will find that he must pay, in additional wages or other terms of employment, the cost that the agreement imposes upon the employee, as measured by the employee and revealed in his actions.

It follows that the employer will insist on such an agreement only if he believes that its value to him is greater than its cost to the employee…

The contract is designed, after all, with the objective of getting the other party to sign it.

If I am designing the contract and offering it to many other parties, that may put me in a position to commit myself to insisting on terms that give me a large fraction of the benefit that the contract produces.

But it is still in my interest to maximize the size of that net benefit-which I do by only insisting on terms that are worth at least as much to me as they cost the other party.

The inherent inequality of bargaining power between employers and workers and the reserve army of the unemployed must not be all that they are cracked up to be these days if low paid workers have to sign legally enforceable restraint of trade agreements.

Obviously, the few members of the reserve army of the unemployed lucky enough to have a low pay, insecure job that offers no regular hours today have so many other job options that their employers must get them to agree not to quit and job-hop at will. Jobs must be readily available  to low paid workers for otherwise why do employers insist on this restraint of trade in employment agreements.

Why do workers sign these contracts, which can include a promise of exclusive services – not working for other employers? Several subsequent blog posts will attempt to answer this question

The inherent inequality of bargaining power between employers and workers doesn’t work too well here because  the worker is accepting this job as compared to these other options , which may include employment in an existing job.

Once a worker is on-the-job and has accumulated job specific human capital, issues of post-contractual opportunism come up on both sides.

An important function of the employment contract is to prevent attempts to renegotiate terms and conditions once one side of the other has committed to the relationship and will find it costly to go elsewhere.

Zero hours contracts are negotiated upfront, which makes them unappealing to anyone already has a job, unless the terms and conditions of a zero hour contract, including the wages paid are much more appealing than officious observers make out.

Richard Epstein made this point about the general operation of the labour market, which is of relevance to our search to the answers to the questions posed by this blog post:

Labour markets are not characterized by tricky externalities. They do not pollute streams or require the creation of public goods. They are not characterized by genuine breakdowns in information, as workers are in a position to observe the conditions of their employment on a day-to-day basis.

Left to their own devices, without explicit support from union activities, they will be highly competitive, and thus work hard to allocate scarce human capital to its most productive use.

Workers have the option to quit for higher wages, and employers can always seek out low cost techniques to reduce their labour costs.

Any short-term dislocation for firms or individuals is more than offset by the overall increase in the system productivity, spurred in part by clear signals that should increase investments in human capital.

Zero hours contracts are a new labour market phenomena . That is no reason to automatically default to monopoly explanations for their emergence, including their emergence in a highly competitive industries and highly competitive labour markets where  employees change jobs regularly.

As Coase said in the context of industrial organisation as a whole and novel business practices in particular:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

The next blog post arises out of my first exposure to the labour economics of working arrangements. Specifically, how the fixed costs of employment and the fixed cost of going to work  both lead to minimum hours constraints in most employment contracts.

Most of what I know about the  labour, personnel and organisational economics of working arrangements  was about explaining  why employers would expect an employee to work as a minimum number of hours if they were to employ them at all. Always good to start with explanations as to why zero hours should not exist, but they clearly do.

Subsequent blog posts will discuss zero hours contracts in the context of the team production and organisational architecture; and zero hours contracts, equalising differentials and job sorting.

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