What's wrong with our job markets?

Sat, 12 Aug 2017

Worry about the lack of ‘good jobs’ is growing, with a widely held perception that our job markets aren’t working.

While I agree the job markets have problems, I disagree with some of the diagnosis, or proposed solutions.  I am concerned that expecting the government to take action to ensure good jobs risks taking us away from what the job market should be doing: incentivizing people to make and do the things people want made and done.

In what follows, I will outline what I think is wrong with our job markets, and what could be done better.   In particular, I see four fundamental problems:

• Ignorance: people don’t know what their choices are


• Externalities: people don’t experience all the repercussions their actions


• Lack of Capacity: some people don’t have the ability to engage in free markets


• Injustice: free markets lead to an outcome we consider unjust

I believe there is a lot that can be done to address each of these, strengthening the power of job markets to deliver the work that should done.

Ignorance

I acknowledge ignorance is a problem, particularly in an interconnected and fast-changing world.  We will all, on occasion, display preferences and make decisions that we probably shouldn’t.

The challenge of working out what we want, can tempt us to make simplifying assumptions that we only care about ourselves and our own wealth (economic models frequently do this).  While I'm not going to claim that everyone is perfectly altruistic, the vast majority of us do genuinely care about others and about things other than wealth, and it seems genuinely irrational to ignore that when deciding what work we want to do.

Another unhelpful simplifying assumption is that only paid work done for an employer, is justified as work and valuable.  I would argue that any activity that creates value for others, that improves people's lives and improves the world, should be considered a worthwhile activity - for example caring for others or enriching our culture.

We will never have certainty, but I do believe that both education and reflection can help us improve our knowledge of the likely outcomes of our various choices.  In particular, I'd argue that the temptation to believe that some group or institution knows better than us what is in our best interest.  I’d argue that this rarely goes well.

Externalities

Our actions have consequences for others, good and bad, that we ignore when making decisions as they don’t affect us.

As societies have grown in size and interconnectedness, our action are more likely to affect others.  Examples come to mind easily, for example someone else polluting near us, or painting their house which improves my neighbourhood.  We should also bear relative position in mind - for example, someone else cannot gain status without us losing it.

I would argue that we need to increase awareness of externalities, and understanding of how each person’s actions affect others in the world (and the planet itself).

While we can punish those that hurt others, or reward those that help others, there is a cost to this monitoring.  (Indeed, bearing this cost is often itself an externality, something done by an individual to help the group.)  I accept that as society has grown and become more open, it has become less good at performing this function, but I’m certain there was never an age of complete justice.

The goal here is to design better incentives to reflect externalities.  This involves challenging trade-offs, between the cost of monitoring and punishing, our value of compassion, and how completely externalities are reflected in individual incentives.  I believe we can do it better than we do now.  

For example, charitable foundations could play a larger role in recognising and rewarding individuals and groups that promote the wider good.  And, though there are definite dangers in public-minded vigilantism, public media does a lot of good in raising awareness of those that benefit at the expense of others.

Lack of Capacity

At present, financial insecurity limits the capacity of a small but growing population to freely engage in labour markets (described by Guy Standing’s book The Precariat).  When you are desperate, it is difficult to make sensible decisions.

Social welfare programmes should work to address this, however our current system makes the problem worse, reducing individual agency and creating perverse and distortive incentives (for example, low or even negative marginal return from working).  

I believe a universal basic income would go a long way to improving such people’s capacity to engage in a free market.

Injustice

Economics suggests that free markets will lead to ‘pareto optimal’ outcomes (those in which no one can be made better off without others being worse off).  Contrary to what some people believe, it makes no claim that these will be outcomes that we’d necessarily consider just or desirable.  For example, we may consider it unjust that someone benefits from a large inheritance; a free market will not correct for that.

People sometime highlight the post-war period as one when labour got its fair share of the profit (in contrast to 2000-2015).  I would argue that while it is good when markets do lead to fair outcomes, we shouldn't count on this in general.  Rather than blaming markets for this, I believe we should accept this limitation of markets, and use other tools for achieving justice, for example redistribution or social care.