The hidden costs of flexible labour markets


What might be good for a firm might not be good for society. Now where have I heard that before?

This post has been brewing for quite some time too, but Frances Coppola’s post on bifurcation in the labour market (yes, I had to look it up too) makes a nice wagon to hitch this one onto.

When I started A-level economics in the mid 1990s we were told about how wonderful supply side policies were and how ‘orrible demand side policies were because they led to things like stagflation. Bearing in mind much of the previous 15 years had been a battle to free the UK from the perils of stagflation – high inflation and high unemployment – I took for granted the arguments in favour of using supply-side policies to ‘free up inflexible labour markets’, and how ‘orrible trade unions were.

Moving onto doing a degree in economics, similar arguments were put forward again. In particular ramming home the point that Marxist economics were a failure because of what happened with the Soviet Union. We didn’t actually study anything in great detail as to what Marxist economics was, let alone allow that understanding to inform us of why it was wrong. It just was because the Soviet Union collapsed. The dangers of being spoon-fed your degree rather than being inspired to question and analyse everything that was put in front of you?

Suffering from the curse of the deep thinker, and being bored out of my mind in my first year at university that was a repeat of what I did at A-level (if I was on the fees of today I might have started a riot), my mind wandered away from the mainstream economists of the day. The author of the core textbook we used for macroeconomics as it turned out was a staunch supporter of Bush. Twice. Then we had the banking crisis. Then Storyville investigated more than a few conflicts of interest in the economics’ fraternity. It was – and still is a fraternity because the field is dominated by White affluent men. I then fired this one off.

“Yeah but Pooffles, what about my econumic praffit?!?!”

I’m seeing this from both sides of the coin in my new world – having had to submit a tax return earlier this year for the first time. Previously, I had always been employed by  organisations so it was all PAYE. When you’re the one having to physically make the payment, setting money deliberately aside, there’s a different psychological feel to not having seen it in the first place as with PAYE. With the latter, I learnt to ignore the tax & national insurance deductions because there was nothing I could do about them.

“But I want more praffit Pooffles, and your taxes and these no-good dead-beat staff with their ‘rites’ are costin’ me!!!”

This is the inevitable tension that political systems with market economies have to handle. And they do it badly. Very badly.

“What’s that?”

We take as a given that the interest of the firm is to make a profit. Long run or short run, it depends on the mindset of the people or institution behind the firm. Asset strippers and banksters take a short term view, pension funds take a long term view. With the latter, it’s one of the reasons why a number of large construction schemes are funded by pension funds – in particular from abroad too. But back to the firm, in order to maximise profits they can do two thing main things: 1) Increase sales or 2) Cut costs. There are various caveats in both. For example in an effort to increase sales your costs can increase disproportionately pound-for-pound. A diseconomy of scale? Ditto with efforts to cut costs. In cutting costs you can end up getting rid of your best staff in an effort to cut the wage bill. Sound familiar somewhere?

On cutting costs, you can do one of three things – or any combination of. The first is to innovate so as to become more efficient, and the second is to get rid of some inefficient people/teams/units. The third is to externalise your costs – get someone or something to pay for them. It is this third one I am particularly interested in. The first one – innovation – requires risk. There’s no guarantee that innovation will be successful. Research and development has a high failure rate. It’s one of the reasons the public sector hasn’t been good at it because high failure rates associated with innovation are politically unacceptable, even though innovation is a nice buzzword politicians like to use. I’ve lost count at the number of ‘innovation’ seminars where I’ve asked the question on who’ll take the political flak when innovative projects fail to deliver – as many inevitably do.

“Externalities Pooffles, what about them?”

If you’re running a fossil fuel-chomping plant, the last thing you’re going to want to do is to clean up the pollution associated with your activities. The thing is, if you are the owner of the outdoor river/lake leisure park downstream, you’re not going to be happy if pollution from that steel plant flows down into your waterskiing course. Who steps in to sort this out? The state.

But…if you’re the owner of a big factory – or several, the last thing in the world you want is to be faced with extra costs. The leisure park is none of your business. It doesn’t make you profits, it’s not your problem. How do you stop the state from imposing tight regulations? You hire one of this lot. Or you offer a seat on the board of your company to one of this lot. Or you provide ‘support services’ to one of these. (I am half-jesting here!) Or, you can donate large sums of money to a political party. Taking the Conservatives as an example, much has been made of their ‘leadership group’ (scroll to the end here). Now, I’m not accusing the Tories of ‘cash for policies’. After Blair got his fingers burnt in the late 1990s I’d be surprised if anyone was so blatant as to say “I’ll give you cash in return for a concession here or there”. Not publicly anyway. But it’s the incentives. Given that funding for political parties has moved away from large groups of small individuals to big name donations, loans and, for want of another word ‘donations for access’, you increase the risk of regulatory capture. Regulators – such as the Food Standards Agency – are accountable to ministers. Ministers determine the broad structure, strategic goals and the amount of funding that regulatory bodies get. One of the most explicit examples in recent times of someone at the top of a large firm hitting out at a regulator was just before the 2010 general election. I’ll leave you to draw your own conclusions on that one.

What’s this got to do with flexible labour markets?

If labour is a big cost, then as a firm you want to get hold of talented motivated staff at minimum cost. As the UK and Irish economies were booming in the early 2000s, ministers in both countries chose to open their borders to the 10 new ascension EU states. This had profound impacts in a number of communities, rural and urban. Some were extremely positive, some less so. Ed Miliband conceded Labour ‘got it wrong’ on this policy. My take is what Labour got wrong was not preparing communities for the influx – just as there was no co-ordinated long-term industrial policy. The assumption was that ‘the market’ would take care of things. That was the orthodoxy of the time.

For a number of employers, they now had a pool of workers who were young, intelligent, motivated, were prepared to live in poorer conditions albeit temporarily, benefiting from a very good exchange rate due to sterling’s strength at the time. Back in 2006 I remember being in Austria when sterling was at 1.40 Euros. Today it’s about 1.15. I met a number of them in both Cambridge and London who said they were here for a few years, saving up money to buy a big house and/or start a new business back in their home country. And on the whole, lovely people too.

What about those left behind?

People in middle class professions were often seen as the beneficiaries of this migration. Getting in a migrant worker who was seen to be more motivated, better skilled and charged less vs the stereotype of people always having problems with plumbers/plasterers/tilers etc. One of my relatives who lives in a community where lots of his old friends are skilled tradesmen regularly complained to me about the impact that he saw in his communities. I was looking at ‘big picture’ stuff while he was saying that his friends could not compete for work because flexible labour markets were undercutting the market at such a rate that they could not afford to make a living given that they had families to feed. In the meantime, various suburban landlords were cashing in on the demand for cheap basic accommodation by building slum accommodation (illegally – in breach of planning laws) in their back gardens.

“What’s this got to do with externalities?”

Everything. It’s the complete opposite of what George Cadbury did over 100 years ago when he chose to build what was then half-decent accommodation for the workers at his factory. The Bournville Village Trust is still going strong today. In the case of Cadbury, he internalised the costs of providing housing for his workforce. In the case of today’s modern flexible labour markets, it tends to be only high fliers, corporate executives and the likes of the next Governor of the Bank of England get housing allowances. What was that about paying the rich more to make them work harder and pay the poor less to do the same thing?

Now, housing is a more extreme case in this day and age. It shouldn’t be in my opinion. If you’ve got decent, stable housing you’re more likely to be able to have a healthy environment to live in, which can increase your health and reduce the likelihood of you being off sick while in employment. It reduces the cost on the NHS too. But if employers pay wages so low that it forces people into poor quality housing, other tax payers foot the bill of irresponsible employers. It’s one of the reasons we have the minimum wage. It forces employers to internalise costs that they would otherwise like to externalise onto the state – whether in welfare payments or otherwise. Yet there are still those arguing for minimum wage laws to be scrapped. My line is that if you cannot pay a wage at a level for someone to make a dignified living, you should not be in business. Society cannot afford you.

Turnover of local population & workforce

It is one of the criticisms of the Government’s welfare to work programme. As Caroline Mortimer said in the Independent, what’s the point of an employer wanting to pay someone when they can get someone for free on this programme & repeat? You could say the same is true with a low-paid migrant workforce. With the economy as it is, and so many people desperate for work, there is little incentive on employers in low-skilled low-paid industries to treat their staff with dignity if it’s all about cutting costs. There will always be someone else waiting to be exploited. Interestingly, campaigners in favour of a higher living wage cite evidence that shows increased productivity and decreased absenteeism when low paid workers are paid higher wages.

Turnover of local population and community cohesion

How many times have you read complaints from people about the loss of the feeling of ‘community’? My take is that you cannot have excessively flexible labour markets and expect to have a community feel. At the same time, you cannot have an immobile community with no one moving in or out without risking the community becoming a little stale. Having excessively flexible labour markets has an impact not just on individuals but on public services too. I see that at the school I am a governor at – it’s been like this for decades. ‘Flexible labour markets’ in academia – reflected by short-medium term fixed term contracts mean that academics have to search for a new contract when their existing one ends. A cause of stress? How can you plan for the future? If that family has children, it inevitably means upheaval for the children too. That also means upheaval for schools as each child leaving means the loss of thousands of pounds of funding. That re-planning and re-budgetting has a financial and a human cost.

This brings me onto Frances’ point.

These excessively flexible labour markets mean people are less likely to plan for the future. I’m not planning for the future. I have no stable income. How can I? Still being new to this world of being a trainer, I have no idea what a reasonable annual income is given my skills and health – the latter being a huge factor in that I am only well enough to work part-time. One month might be a good month for commissions, which might be followed by two where I don’t get any. Not the sort of thing you can plan a mortgage for!

Frances nails the hidden costs to businesses. Few want to invest in their own talent. They’ve externalised it all to the state because in excessively flexible labour markets, poaching is a huge problem. Businesses have externalised costs of training and education to the state, who have externalised it onto the students and their parents. And in an era where you have no career for life and have to retrain, who is it that foots the bill? Exactly. I’ve moaned about this before.

On the community cohesion point, compare a local pub in a stable community with a city centre bar. Which one has the nightclub bouncers and why? Local pubs on the whole don’t need private security because (certainly at the pubs I’ve been a regular at over the years) the locals do that job themselves. I remember one time in my very late teens at one local in Cambridge I popped in for a pint and about 10 minutes later, someone I had never seen started harassing the landlady. In a matter of second about 15 people appeared from nowhere telling this individual it was in his best interests to leave. Private security is a cost. It might show up well on your national income figures, but it’s a cost. Manning the barriers of gated communities. Hidden costs, segregating communities – the rich from the rest. Even when it comes to childcare, excessively flexible labour markets can mean parents unwillingly having to move away from the rest of their family and support network. Another cost having to buy in child care. Excessive labour market flexibility means that in mobile populations, you don’t have the time to settle to get to know anyone to build those socially supportive networks and communities because people quickly move on.

So let’s not pretend that flexible labour markets are a one-way good thing that the free market economists might like to think they are. Flexible labour markets have costs – real ones. Once you start factoring those costs into your economic models, what does the picture start to look like? Perhaps not as rosy as they assumed. But hey, economic models and theories are full of assumptions. Whenever anyone talks about economic models and markets, it’s worth asking what assumptions they are making at the start.


One thought on “The hidden costs of flexible labour markets

  1. Inflexible labour markets also have a cost, not just to employers but to people. If you can’t leave your community (because no other community will have you) you are much more constrained by the social norms of the community you happened to start in. I think that the freedom to move away from a community that is hostile to you, and to find one you like better, is an enormously important freedom.

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