Labour market reallocation in the wake of Covid-19
voxeu.orgThis seems right, but I think we're seeing how resilient the real economy is, given appropriate financing. It's almost always the financial/monetary side that's the problem.
An economy can usually make more of stuff, or substitutes, and/or consume relatively painlessly. The pain kicks in when the financial sector feels pain. The real economy reshuffles if it's financed adequately.
Monetary policy, currently, finds itself oddly theoryless. I think this has actually made for better decision making. The own goal of trying to save and/or reduce debt in response to a shock hasn't been scored.
So... I agree that the economy has had to do a lot of resource, shuffling. Some prices have gone up in the real economy. People are still unemployed, in sectors like travel that really got shut down. In others, there's are some struggling to find labour. Mostly though, it's a case of "look how easy that was." In the financial economy, credit is available, keeping everything ticking.
> An economy can usually make more of stuff, or substitutes, and/or consume relatively painlessly. The pain kicks in when the financial sector feels pain. The real economy reshuffles if it's financed adequately
Isn't money just an abstraction over resources? In essence i think you're saying that creating goods is not a problem assuming there are sufficient resources to make the goods and sufficient resources to compensate the people making the goods.
While i don't disagree, doesn't that kind of go without saying?
"Isn't money just an abstraction over resources?"
I think the economics of money tends to compete on which common sense, to follow. Taken to the extreme, you could say that money doesn't matter. Only resources and the real economy matter.
That, IMO, is negated by the history of money economics affecting the real economy. Money shortage is a thing. If the economy hadn't been funded, the resource shuffling wouldn't have been possible... or more painful. People don't get compensated for resources and labour in exchange for goods and labour. They get compensated in money, which is at some point down the cascade, credit. If money is short, it doesn't matter what the productive capacity. That reshuffling doesn't happen smoothly.
So, no... I think. At least, not in a sense that commons sense implications can be applied. Money isn't just an abstraction over resources. It's a thing unto itself. Money supply issues, hyperinflation, financial shocks, credit shocks and have been more likely to affect major real economy problems than supply of actual stuff like oil. Oil shock is a thing. There definitely are real examples of crippling resource shortages. More often though, money supply is the issue.
> Money supply issues, hyperinflation, financial shocks, credit shocks and have been more likely to affect major real economy problems than supply of actual stuff like oil
Yeah, but all those things describe situations where money and resources got out of whack.
Yes and no. Money is an abstraction over resources. However, it's not quite that simple once you add credit/borrowing into the mix. We no longer trade sheep for lumber; we no longer buy lumber with cash from our wallet. Instead, we borrow from the bank, buy more lumber than we could otherwise afford, on the assumption we can turn around and sell finished houses before the loan comes due.
If the bank stops lending, we can no longer buy enough lumber to build the houses. The market slows significantly - instead of building 100 houses at a time, we have to build them one at a time. The demand for 100 houses hasn't changed (all else being equal), but the supply has. Prices probably go up, but until the bank starts loaning, the pace of the economy doesn't return to previous levels.
Or something like that. Way too complicated to distill into a single post.
Credit is an abstraction over future resources. When you take out a loan, you're basically saying "I am betting that I can produce enough in the future to pay back the resources that I am using now." And if you don't, you're on the hook for it, and potentially go bankrupt.
That's why the financial sector is the weak link, and also why it's very well-compensated. Finance is a future-prediction problem: you do well if you successfully predict which investments will pay off, and you go bankrupt if you fail. Predicting the future has always been hard.
The reason we get these boom/bust crises is because instead of using their own judgment, many people, when faced with a hard problem, will just do what everyone else is doing. So the whole financial industry lemming-trains into bad investments, and then when they bust, they all go bankrupt and there's no resources to go around until the wreckage has been cleared away and placed in more independent manager's hands.
Credit is an abstraction over future resources from the perspective of either party. To the economy, there is no future. If everyone saves all their money, the economy ceases to produce. It doesn't hold that production in reserve.
The financial aspects you mention has a cost - there is no free lunch. No doubt the financing is also causing some of the delay in efficient reallocation.
But the piper must be paid in the end. Ideally it’s similar to 2008 where the govt unwound all the extra money, over time, relatively painlessly.
Of course that’s not guaranteed at at all. If inflation gets out of control then you could see a major economic shock as the govt quickly unwinds.
I don't think it's going to be painless. There are asset bubbles in multiple sectors ranging from real estate to collectibles. Either these will pop and many will be left holding the bag or more serious inflation is on the way.
Assets have increased in value because interest rates are close to zero per cent. Other investment classes (like bonds and cash savings) have a similar return on investment to the interest rate i.e. close to zero. In this scenario it makes sense to go for assets like property and shares because the opportunity cost is favorable.
One of the most straightforward ways the asset bubble will pop is if interest rates rise. For interest rates to rise there needs to be inflation at high levels for at least a couple of quarters. If we see another few months of inflation above 4% the fed will need to signal shift toward increasing the interest rate, only then will we start to see a rebalancing of investments away from assets and back into cash.
Not necessarily. Just look a crypto, these people are not selling. Just being a crypto millionaire on paper is good enough of a reward. They have no desire to sell it all and buy a bunch of retail goods. Housing is unaffordable to average workers in many places, but consumer goods are not going to inflate like crazy until there is a higher demand for them.
I think there's a mirror to this in the real economy too.
"Capital" isn't consumed by much of the tech industry in the same way as it was/is by manufacturing. If you're a toaster startup, you'll need a factory, steel, etc. Actual, physical capital that needs to come from somewhere. When your toaster startup goes viral and scales, you'll need more of that physical capital. For every toaster you sell, you'll need to buy more parts and materials.
A tech startup needs riskable money to figure out what they're making, but once it's profitable, they're not sitting across from bankers discussing finance. Also, when covid hits and demand for movies skyrockets, amazon prime or netflix can sell as much as people will by. There's no need for prices to go up. Marginal costs don't exist.
They're pretty much insulated from both real and monetary shock. All they care about is demand. There will not be a shortage of steaming content services' supply chain. A netflix is limited in how much it can invent, but it isn't limited in how much it can produce. Doubling the number of subscriptions or viewing times is trivial. They don't owe on loans.
Under that scenario inflation could hit A list entertainer salaries. Chapelle could say his next 1 hour special is going to be licensed for 800 million dollars to whoever wants it.
> Ideally it’s similar to 2008 where the govt unwound all the extra money, over time
They did? https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
We only started "unwinding" in 2018 and wasn't even close to undoing everything from 2008. Then the pandemic hit and all of that was undone.
I was referring more to the TARP program, but your point is taken.
"There is no free lunch" is like one of those religious quotes that can mean anything and its opposite.
What does "unwound all the extra money" mean? They didn't run surpluses, which means more money circulated out of the economy than in. That's why they were less reserved, this time, creating more of the stuff. They realised that it doesn't have to be paid back.
There is no free lunch. Printing more dollars doesn’t mean you have more money. Lowering interest rates so it’s cheaper to borrow doesn’t mean you have more money. The government buying up bad assets doesn’t mean those assets suddenly have a higher value.
There is no free lunch. Eventually asset prices reflect underlying value - not too many dollars chasing too few assets. Eventually inflations forces higher interest rates and the value inflation disappears. Eventually bad assets are correctly priced and value disappears.
It’s like the financial crisis in 2008. You can go years with increasing prices, but if it based off false premises and not a true increase in productivity, then that value eventually disappears. If it happens suddenly it has massive ripple effects through the economy.
> Printing more dollars doesn’t mean you have more money.
Often it does, because “printing money” avoids a cascading effect of negative feedback.
Imagine in the days before FDIC insurance that due to a sudden asset depreciation or error, a large bank does not have cash on hand to meet customer withdrawals today. Because of uncertainty, other banks are not willing to lend to the troubled bank on short notice.
If the Fed does nothing, customers will panic. They will sell their stocks, and withdraw money from other banks. Now the market is crashing and other banks are running low on reserves. Credit tightens up and interest rates rise. Businesses stop investing, consumers stop spending, and unemployment starts rising. This is a vicious negative feedback loop.
Instead, if the Fed had stepped in and simply materialized cash out of nowhere, and assured the public that they would guarantee all deposits no matter the cost, the entire crisis would be averted. When negative feedback cycles are so destructive, merely instilling confidence is about as close to a free lunch as you can get.
I’m not arguing it’s not a useful tool. I’m arguing it has an eventual cost that has to be paid.
If my wages suddenly get reduced by 20% so I start borrowing against the equity in my home that solves the immediate problem but also creates another problem.
> It's almost always the financial/monetary side that's the problem.
How do you explain hyperinflation, where there is too much money chasing too few resources?
I didn't mean that money shortage is always the problem, that that has been often the notable case in recent experience. Hyperinflation is also a monetary/financial issue, too much money, not enough demand, crashing value.
I think the difference between inflation & hyperinflation is that "inflation" can be contained mostly within the real economy. Hyperinflation, has to have a macroeconomic, money supply related, explanation.
Lebanon's current mess, for eg, is more or less the consequence of letting Beirut banks do what stablecoin does, but the old fashioned way. High interest dollar accounts, backed by high interest Lira. Lira loans, backed by the same dollarized banking system. Dollars come in, and dollars are owed. Liras go out, and Liras are owed back. It works until the underlying currency bends. Liras come in. Dollars go out. A port explosion & widespread loss of confidence in the governing system are part of the story.
The upshot I'm driving for is that stuff happening entirely in the money markets causes determines goods flowing in and out of ports and fibre, not the other way around. It's not lebanon's ability to export goods that changed and killed its ability to import goods and resources. It's its inability to import dollars, and its ability to pay using Liras that collapsed first.
Hyperinflation is too much currency chasing too few resources, but currency is not the same thing as money. There are a whole bunch of nonlinearities because the value ascribed to a unit of currency does not instantly update when new money enters circulation and people speculate about long term behavior, but over the long term if you 100X the currency supply, a dollar is simply 1/100th the amount of money it used to be.
The UK's Coronavirus Job Retention Scheme (where people are put on furlough and the government contributes to wages) seems to have damped the creative destruction usually seen in recessions. To use a basic example, assuming there will be more remote work in the future compared to pre-COVID times, there will likely be fewer people who commute and fewer people who buy sandwiches at Pret.
Perhaps a better solution is to make furlough portable, so that workers can read the writing on the wall and be part of the reallocation we are soon to see. [1]
[1] https://blogs.lse.ac.uk/covid19/2020/11/05/making-furlough-p...
It was interesting that retail closures actually fell last year. I’m pretty sure there are a lot of zombie companies out there just clinging on.
It will be interesting to see how it all unfolds.
It will be interesting to compare with Germany and France, their wage support schemes are more flexible than the all-or-nothing UK furlough one.
Maybe occasional shocks to the labour market would be a good policy going forwards. It seems a lot of people have suddenly found much better jobs just by being forced to look...
I work as a software developer in Norway. I've long had the impression that there are a lot of workers in my industry – particularly older people but not exclusively – who simply don't seem to care that much about their salary or total compensation package, don't put a lot of effort into salary negotiations and who tend to be happy with annual salary increases just above what's necessary to keep up with inflation. Good for them, but they harm everyone else by bringing down the mean salary in the industry. If there are lots of older developers who are perfectly happy with earning $80,000 10+ years into their career then it's very hard to justify why you should earn $120,000 with three years of experience, even though the value you bring to the company is much greater than that.
This is exacerbated by the fact that it's very hard to fire people and that most developers work for relatively large and stable companies that rarely go out of business. Both of these factors are pleasant for the workers (including myself), of course, but they can have a negative or stabilising effect on salaries. Regular shocks which would cause poorly run companies to go bankrupt without changing the aggregate demand for developers would help push developer salaries upwards.
As a younger developer I certainly had an unrealistic idea of my value to the company's profitability which has attenuated to a more realistic assessment these days: maybe that's part of why "older developers" are satisfied with relatively lower salaries. It may also be to do with a healthy attitude to work/life balance: demanding a higher salary can correlate with greater demands on your time (including even weekend work).
My view is that competent developers can rise to the level of income they deserve, without sweating it too much that others with more experience are somehow keeping them back.
The point is that because of the mentioned factors, artificially little of companies' revenues flow to developers (in the form of wages or other compensation). If the general salary level of developers in the local market increased, then I believe that would happen without large sacrifices to workload or work/life-balance (many of which would be illegal under local laws anyway), because it would only make up for the salary level today being artifically low.
If you think you're worth 120k to some company, you should find that company. Or found it.
I'm quite happy with my current salary – the problem is that I don't know anyone with my level of experience who earns more than me, and I'm certainly not the person among all my friends and acquaintances who provides the most value to his company. I've ended up where I am by spending a lot of time looking for jobs and being very selective, but it would be nice if the general salary level were higher so that more people could get paid according to the value they provide.
Weirdly enough, your comment makes very much sense. But at the same time it reads like it would be nice from time to time to get a natural disaster here, economic crisis there, and a little war next door — just so that people know that they must always be ready to fight for something better rather than being content with what they have. Which also makes very much sense, in a way.
The gist of it seems to be the age old “problem” that older people are conservative and want stability while younger people want new things and to their own place in the world. It used to be solved naturally by older people dying and freeing up space, but recently society started progressing so much faster than before that people are not dying fast enough to “keep up” with the progress by taking their old and obsolete things, viewpoints and habits to the grave.
Shocks to the labour market without an adequate safety net to cushion folks from the personal fallout of labour market shocks is a good recipe for resentment
I agree completely.
Im all for adequate safety nets. I like UBIs personally and the response to the pandemic (on both sides of the pond) isn't far off of that.