What is the labor market for? The labor market is not just there to provide jobs, according to Richard Reeves, a researcher at Brookings, but actually performs three crucial roles:
- Allocating labor to capital in the interests of economic production;
- Boosting well-being through structured, socially-endorsed activities; and
- Distributing national income through wages.
Reeves observed that the labor market in most advanced economies has performed these functions well in the last seventy years or so, i.e., since World War II. Skills have been matched to capital, producing dramatic increases in economic output. Paid jobs have provided a social anchor for men and women, packaging purposeful work into manageable pieces. And until recently, wages have proved a successful mechanism for sharing the proceeds of wealth.
While the labor market continues to work pretty well as an economic institution in matching labor to capital for production, it is no longer working so well as a social institution for distribution. Structural changes in the economy, in particular skills-based technological change, mean that the wages for less-productive workers are dropping. At the same time, data from the Bureau of Labor Statistics indicates that the share of national income going to labor rather than capital is dropping.
Almost every social and economic policy debate is centered on improving the labor market.
Labor's share of U.S. national income has been dropping for 15 years. Why?
According to Roc Armenter, an economist at the Federal Reserve Bank of Philadelphia, there are three leading hypotheses purporting to explain the decline of the labor share in the U.S., but economists do not yet have a full grasp of the underlying determinants:
- Capital Deepening: Technological innovations produce better and cheaper equipment that replaces workers and redistributes income from labor to capital. Capital should be viewed as at least a partial substitute for labor — more and more so as technology develops.
- Income Inequality: Technological innovation is skill-biased, i.e., it augments productivity more for highly skilled workers than for low-skilled workers, thus making the low-skilled workers redundant and their wages fall. Interestingly, this is somewhat offset by the increasing wage inequality at the very top of the pay ladder.
- Globalization: U.S. industries that are more labor intensive outsource their work to countries with cheap labor while industries that are more capital intensive remain in the U.S. The result is an increase in the capital share of income and a decrease in the labor share. However, the decline of labor share is a global phenomenon.
Sweat equity is entrepreneurial labor!
What could be missing from this picture? For one, the impact of technology startups, e.g., many of them going back to the Dotcom era of the late 1990’s, has not been accounted for. Their many high-value exits and subsequent sale of stocks by founders and early employees is deemed to occur, coincidentally, after 2000. While the Bureau of Labor Statistics (BLS) has taken great pains to distinguish between wages and profits in proprietor’s income (i.e., income of sole proprietorships and partnerships), scant attention has been paid to discern between "sweat equity" and “preferred shares” in gains from participation in technology entrepreneurships such as Silicon Valley startups (e.g., other than perhaps the GAAP rule for corporate expensing of employee stock options starting in 2005).
Venkatesh Rao, who is advancing a radical-sounding hypothesis — entrepreneurs are the new labor — from the perspective of “balance of power” between the investors and technology entrepreneurs, observes that: “this restricted class of entrepreneurs is quite significant in terms of both numbers and economic impact, and is growing rapidly.” Given the increasing dominance of tech startups, e.g., the thundering herd of “Unicorns”, on the economic scene in recent years, it is quite plausible that the observed “drop” in the labor share as traditionally measured by BLS (i.e., under its seven “Income Components of Economic Output”) masks an increasingly larger slice of common stock sale by entrepreneurs from technology companies. After all, the vastly increased valuation of technology startups is derived from a combination of entrepreneurial labor (i.e., "sweat equity" or “common stock”) and venture capital (i.e., “preferred stock”), both of which are treated as capital share of income by the Bureau of Labor Statistics. In other words, the entrepreneurial labor share of income, whether realized through acqui-hire, M&A, or IPO, has effectively been camouflaged in the national economic statistics!
Could something like this also be happening to non-manufacturing service sectors such as R&D, graphic design, or data science? What about all the other sectors served by the “Ubers of X” of the world? What about all those "free work" going into game play? (Source: Armenter Roc).
An emerging trend in large-scale problem-solving known as “swarm work” is creating intense competition within a huge labor pool, and is pioneered by companies such as InnoCentive, 99Designs, and Kaggle. InnoCentive, for example, operates a contest format to crowd-source innovation solutions to important business, social, policy, scientific, and technical challenges. Founded in 2001 by Alpheus Bingham and Aaron Schach, InnoCentive has built up a network of 365,000 registered problem solvers from 200 countries who compete to provide ideas and solutions to various organizations such as Eli Lilly, AstraZeneca, Booz Allen Hamilton, Proctor & Gamble, NASA, Thomson Reuters, Department of Defense, and several government agencies in the U.S. and Europe. Since 2001, InnoCentive has posted over 2,000 challenges, reviewed over 59,000 solutions, and handed out more than 2,400 cash awards (ranging from $5,000 to $1 million) totaling $48 million.
From the standpoint of corporate and government clients, the InnoCentive approach is both cost-effective and efficient. A 2009 study commissioned by InnoCentive examined its economic impact on one client company, the Swiss agribusiness Syngenta, over a three year period. In total, Syngenta ran 56 challenges at the cost of $10,000 each, and paid out about $1.9 million for successful solutions, for a total expense of $2.5 million. Syngenta estimated that running 56 projects, at the rate of $120,000 per scientist per project, would have cost the company more than $6.7 million in salary alone. In general, the success rate of posted premium challenge is reportedly around 85%. From the worker's point of view, however, introducing project-to-project competitions, while potentially rewarding, does not necessarily make for a stable income. It would seem that the InnoCentive model works best for those already in some kind of salaried position or with another source of income.
“We’ve got organizations that need to figure out how to make talent and work pools function globally,” said Dwayne Spradlin who was InnoCentive’s CEO at the time of an Aspen Institute study in 2010 called The Future of Work. “Organizations need to figure out a way to move from fixed procedures and infrastructure to variable ones in organizing and optimizing resources. And now we’ve got the millennial generation coming in, and if anything, they’re more project-based, not jobs-based, which means we need to think about how to orchestrate work talent in an environment of constant churn. There is a need for a whole new business science that can help organizations function more effectively in this ‘new normal,’ if you will.”
As it turns out, a big part of what Spradline referred to five years ago as “a whole new business science”, in its simplest form, is a relatively recent phenomenon we now call the “Uberization of work”, which resulted in the spread of a “Sharing Economy” that is reshaping the labor landscape. To wit, the rise of a slew of startups underscores this seismic shift in recent years across many service industries that employ human labor at the other end of the innovation spectrum: AirBnB (founded: August, 2008), Uber (founded: March, 2009), Postmates (founded: May 2011), Lyft (launched: summer 2012), Instacart (founded: June 2012), Handy (founded: June 2012), HomeJoy (founded: July 2012, RIP: July 2015), DoorDash (founded: February 2013), Washio (founded: March 2013), Shyp (founded: July 2013), etc. This sea of change is simultaneously lifting productivity while creating downward pressure on wages across a wide range of service industry sectors from travel to transportation, delivery, care-giving, and all different flavors of home services and errands.
The decoupling of the economic and social functions of the labor market — a result from the rise of the many "Ubers of X" — poses a stark policy challenge. Increasingly, the idea of a universal basic income is capturing the imagination and attention of policy intellectuals, across the globe and across the political spectrum. “We may find ourselves going into the future with fewer jobs for everybody,” said Michael Howard, coordinator of the U.S. Basic Income Guarantee Network. “So as a society, we need to think about partially decoupling income from employment.”
A Short History of Work (Source: The Rise of the Naked Economy).
The decoupling is complete; all too successfully in the particular case of Ingress, a massively multi-player augmented reality game from Niantic Labs, which was recently spun-off from Google. Not only is employment no longer needed for work to be performed, income has vanished, too. Think of it as “gamified work” on a global scale, where networks of humans act as sensors to the real world on behalf of machines in the cloud. Often described as “Foursquare meets capture the flag”, the Ingress game is played on Android phones where work is cleverly disguised as play in a way that would have made a fence-painting Tom Sawyer proud.
The game is set in a universe in which so called “Shapers” are changing the ways human think. Those Shapers do this via “exotic matter” that is leaked through portals into this world. The goal of the game is to capture as many portals — usually landmarks and points of interest — as possible and to link them to fields to either enable or stop the influencing of the human mind. Two factions battle each other: the “Resistance” who believe that humanity should not be controlled by an alien force; and the “Enlightened” who believe that the exotic matter will transcend humanity to a higher state. The game requires the players to actually go outside and to walk/cycle/drive to a portal and stand within 100 feet of the portal to interact with it. Players enjoy seeing their surroundings with new eyes and discovering new things in new places. The cooperative element of the game makes it social and usually leads to meeting up with new acquaintances and friends.
So what is Niantic or Google getting out of this? They are benefiting from Ingress in a number of ways, chief among them map data and advertising. Consider map data: players are asked to find the quickest way to the portal. As most “agents” are playing the game on foot, this delivers valuable walking map data, for free. What’s more, all portals are landmarks and points of interest; so almost every single landmark worldwide gets visited by agents. The alternative for Niantic or Google would have been to hire a local team of humans to walk the streets and collect data, e.g., as in how Google captures data for Street View, which would have been prohibitively expensive on a global scale (but would have nicely added to the labor’s share of income). Alas, one does not get paid for simply playing games.
"Give 'em basic income and let 'em play games!": Could this be the end of work? Or is this the future of work? What's the difference anyway?
“Would I ever leave this company? Look, I’m all about loyalty. In fact, I feel like part of what I’m being paid for here is my loyalty. But if there were somewhere else that valued loyalty more highly, I’m going wherever they value loyalty the most.”
References:
- Reeves, Richard V. (2016, February 23). Time to Take Basic Income Seriously. Brookings. Retrieved from: http://www.brookings.edu/research/opinions/2016/02/23-time-to-take-basic-income-seriously-reeves
- Isaacson, Betsy (2014, December 14). How to Fix Poverty: Write Every Family a Basic Income Check. Newsweek. Retrieved from: http://www.newsweek.com/2014/12/26/how-fix-poverty-write-every-family-basic-income-check-291583.html
- Baker, Brian I. (2016, January). The Laboring Labor Share of Income: The “Miracle” Ends. Bureau of Labor Statistics. Retrieved from: http://www.bls.gov/opub/mlr/2016/beyond-bls/the-laboring-labor-share-of-income-the-miracle-ends.htm
- Armenter, Roc (2015, Third Quarter). A Bit of a Miracle No More: The Decline of the Labor Share. Business Review, Federal Rserve Bank of Philadelphia. Retrieved from: https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/2015/q3/brq315_a_bit_of_a_miracle_no_more.pdf
- Rao, Venkatesh (2012, September 3). Entrepreneurs are the New Labor (Parts I, II, III). Forbes. Retrieved from: www.forbes.com/sites/venkateshrao/2012/09/03/entrepreneurs-are-the-new-labor-part-i/, www.forbes.com/sites/venkateshrao/2012/09/03/entrepreneurs-are-the-new-labor-part-ii-2/, www.forbes.com/sites/venkateshrao/2012/09/04/entrepreneurs-are-the-new-labor-part-iii/
- Coonerty, Ryan and Jeremy Neuner (2013). The Rise of the Naked Economy: How to Benefit from the Changing Workplace. Palgrave McMillan.
- Bollier, David (2010). The Future of Work: What It Means for Individuals, Businesses, Markets and Governments. Aspen Institute, 2010. Retrieved from: http://www.aspeninstitute.org/sites/default/files/content/docs/pubs/The_Future_of_Work.pdf
- Ford, Martin (2015). Rise of the Robots: Technology and the Threat of a Jobless Future. Basic Books.
- Slee, Tom (2016, February). What’s Your is Mine: Against the Sharing Economy. OR Books.