Labor Participation: Economic case for dropping out

This is continuing my thoughts on possibly overlooked influences that could contribute to a decades-long trend of declining labor participation rates among working age adults.   I’m considering this from my data science point of view of using data to discover new hypothesis.  Unfortunately, I don’t have access to big data so I use what little I have available from a casual observer.

In my past discussions of labor participation, I drew upon popularized trends of culture over the long period from the much ridiculed culture of the 1940s and 1950s to the much more enlightened culture that followed.   In past posts, I suggested that there were qualities of older culture that could encourage workers who borderline had a choice of not working (who tolerate minimal-cost living).  These included the elimination of tobacco culture that could provide psychological relief from an otherwise intolerable job, the elimination of the after-work culture that resulted in employment satisfaction beyond job satisfaction, and the culture of observation that allowed one to accumulate content to share in social life as amateur scientists.

Today’s topic is an attempt at an economic argument that work is not the bargain it used to be.   I mean bargain in the sense of the balance of risks and rewards.  I’ll grant without proof that modern work has a higher monetary compensation in real dollars compared to work of earlier times.   The increase in up front money is in compensation for the risks transferred to the employee.

It is difficult to measure the monetary value of risk.   One way is to see if the bargain affects the size of the market.   In context of commerce, a measure of equal compensation of lower prices for lower quality may be no change in the normal rates of number of items sold or number of customers served.   Labor force participation rates may serve the same purpose for the labor market.

I recognize that macro-economic concepts such as nationwide labor force participation rates can have many contributions involving changing demographics, bad distribution of labor with respect to where work is needed, or mismatch of skills with job openings.   I suggest only that there may be the following additional contributing factor.

The considerable rise in monetary benefits is not keeping up with the burdens transferred to the employee.

Looking back to the period of roughly the first half of the 20th century, the nature of the relationship between employee and employer has changed.

Looking back even further to the century preceding that period, I see industry struggling to entice people to join the work force.   See my post on Moby Dick where I wondered why “call me Ishmael” went to consider trouble justifying his choice to submit to a job despite the obvious fact he was penniless.   I think this was Melville talking to his audience to convince them that the book was worth reading because the narrator had good reasons other than money to sign up for the job.  This suggests to me that there was a time when people joined the work force very reluctantly.

Early industry could be characterized by very low productivity rates that could not support high wages or salaries.    Faced with the demands of growing the work force in order to meet their own growth needs, they had to offer other enticements either explicitly negotiated such as through labor-management bargaining sessions, or just implicitly in trying to make attractive offers to reluctant workers.

Those enticements took the form of the employer absorbing burdens or risks of the employee.

I recognize and grant that often and especially early in the industrial age, there were real physical risks unique to the work place.  But there were similar risks of injury and death that could occur outside of work though different causes.

What I am referring to are absorbing long term risks.   The compensation of the job was not just that it financed present needs but that it offered some piece of mind about the future.

I want to state up front that there were limits to these assurances.   Layoffs could happen.  Businesses could fail for various reasons.  If these happen the bargain is not realized.   These commitments were like other contracts.  As long as the business was sound, the company would commit the employee’s future.   The following are some of the commitments offered to attract workers:

Hiring unskilled labor with an internal program of training and job advancement.  Companies sought out unskilled who were honest, hard-working, and loyal.

The company offered large step increases in wages associated with promotions due to attaining a higher level of skill or responsibility.   The wages were set by the job description independent of the employee’s previous compensation.

The companies set a clear concept of a corporate mission beyond its identity.   The employee has a clear idea of how he can contribute to that broad mission.  Also, because the employee’s work is integral to that mission, the mission absorbs most risks or liabilities.  An employee may be fired for some action but generally the company absorbs most external liabilities, legal or otherwise.  The employee was like an agent or representative of the corporation.

Company’s strove to provide defined-benefit retirement plans especially beneficial for the employee who starts young and stays for his entire career.    This was a contract like any other that may not in fact be realized if the company fails.  Even with that uncertainty, a potential employee may be enticed to join on that personal commitment that as long as the business survives, it will commit to the employee’s post-retirement income.

There is room to argue about the relative strengths of these kinds of offers from companies.   However, all of these benefits rest on my basic presumption that there was a time in our history where even destitute people needed more than just money to entice them to work.   I think this is a radical idea to modern thought.  I admit I might be wrong.

Today we divide the population not between who is working and who is not but instead who is receiving income from employers (or investments) and who is receiving income from government entitlement programs.   We take for granted a substantial cash flow at the individual level.   I’m suggesting that earlier in our history this was not true.   People without money were willing to forego employment opportunities that didn’t offer something more than just a cash allowance.    At least there were enough of such people to be seen as an opportunity for companies to sweeten their offers in their attempts to fill their labor needs.  (The rise in popularity of labor unions may be partly a reaction to companies not meeting this expected obligation).

If such people once existed, could it be that they still exist?   With generous and extensive government assistance programs, it is very hard to tell.   But I have seen maps of geographic distribution of non-working adults that showed that these are more common in rural areas than in urban areas.  I know a little about rural cost of living.   I don’t find it hard to imagine that human nature hasn’t really changed that much over the past century.

By the end of the 1950s, employment especially at large companies were seen as very appealing to the broader population.   With some justification, there was a sense that these opportunities were not available to sections of the population such as women and minorities.   The push for equality in the workplace must have partly been motivated by the attractive offers the corporations provided their employees.

As an aside, I believe that the changes of removing any discriminatory barriers benefited industry.  I have not seen convincing evidence to the contrary.  But completely coincidentally, the nature of business itself began changing at about the peak of this sweet deal to employees.

At the risk of over-trivializing the trend, I’d describe this trend as the pressure to globalize the business.   Businesses needed global markets not just for customers but for capital.   Globally minded investors (a major portion of which are corporate retirement fund managers) demanded that businesses become globally competitive.

Investors demanded that companies walk back the non-monetary benefits.   More and more burden was placed on the employee.  Often this shift of burden was offset by higher wages.

Expectation or even hint of long term commitment of employees was first to go.   Early in the 1970s, I recall the message that this was an obsolete notion.

Eligibility of low-skill hires with onsite training was next to go.   Employees were expected to be skilled in order to get hired in the first place.  Employees are expected to invest in updating their skills for their future marketability.

Promotional compensation became based on a percentage wage increase instead of set a common value of that position.   In long term employment, the earnings potential changed to being constrained by that initial job offer salary.  Fair market value usually required a change in employer to set a new first-hire baseline compensation.

Health care benefits became shared costs with employee contributing more the premiums, deductibles, co-pays, and co-insurance.  The trend clearly is for this to disappear entirely as an employment benefit at all.

Retirement changed from defined benefit to defined contribution.  The company transferred the burden of financing the retirement to the employment by offering up front cash for the employee to invest.  This makes sense economically because the value of the employee’s contribution is reflected on the business that occurs during the employee’s employment.  But for the employee, the employee absorbs the full burden and risk of assuring a retirement income.

In addition to the degradation of earlier deal-sweeteners, there is a shift of liability from the company to the employee.   There is increased legal and liability jeopardy for actions that can only occur in the workplace.   Ever increasing government regulations trickle down to the employee.   The employee is vulnerable to more criminal or civil actions from activities at work.   There are frequent news of some new person being severely sentenced due to actions done during employment.   We applaud this without considering that the employer itself may be more culpable.   Subtly, the corporations have become more valuable to investors by being less vulnerable to legal actions because the brunt of the punishment can be passed to an employee.

In addition to explicit regulations are the general increased attention to the appearances of good ethics through stricter codes of conduct with more strict enforcement and mandatory training and sensitivity awareness.   These codes have remedies extending to post-employment civil lawsuits or criminal charges.   This is not inherently wrong.  What is wrong is that the possibilities for possible wrongdoing have exploded to the extent that with sufficient motivation there is likely some charge that the employee will be unable to defend against.

These regulations are increasing tested through unannounced audits that provoke considerable anxiety to answer honestly with answers that don’t violate some stated policy.   The policies coming from different perspectives overlap with contradictory rules.

I want to return to a point that I think is very subtle.   It is a point I’ve made before in other posts.  And that is the importance of acknowledging intelligence or what may be described as the basics of being human.    I return to my hypothetical that even people without much money needed more than money to be enticed to work.

People did not look at work as a cash-flow proposition.   They were reluctant to sign on to a contract with a corporation because the corporation was faceless.   People readily sign contracts with each other with a handshake that says each will give their best to meeting the terms of the contract.   That handshake is key.   It says there is a relationship that each are respecting each other’s ability to deliver with good will.   Even though it could be presumed that either or both parties are seeking to take advantage of the other, the contract is still between humans who respect the fact that they are humans.

To entice people into employment, companies had to build a human face.   The money wasn’t enough to get a human to sign a contract.  There had to be a human connection of mutual respect and recognition.   How can corporations replicate that handshake?  They needed to strengthen the contracts with commitments that expressed more explicitly what is expressed with a two human-party handshake.

Today, employment has become a commodity market.  Employees have become specialized units of labor to be rented when there is a need for their specialty and released when the that specialty is no longer needed.  The specialization has become ever more specific: for example a company changing a vendor of some equipment will actively replace staff with new staff to be specifically qualified for that particular vendor.   This is often done subtly through subcontracts, but the effect is the same.

Gone are the days of hiring based on human recognition of a person being able to work hard and in good faith.

Gone are the days where the employee sees anything human about the other side of the contract.

People have not changed much over the few centuries since the start of the industrial revolution.   People naturally prefer human-to-human contracts where there is an extra human element above the strict obligations of the contract.    If that need is not met, then the contract is not worth the bother.


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