Frictions Are Our Friends

I have been reading the interesting follow-up interchange between Richard and Robin, and wondering how I can add some value. Now that Frank has thrown the grenade of salary caps into an otherwise civil conversation, I have the opportunity.

But, first, kind regards to Frank, who made very extensive and very valuable comments on my review of The World is Flat. One of his best ones was related to the idea of salary caps. It made me do a considerable revision. Back on this later.

Here’s my view on the idea of salary caps: Frank didn’t really mean it. He was only kidding.

Frank’s analogy of the NBA and the US economy is not at all apt. The service that the NBA provides is an entertaining contest for which parity of the contestants is essential. It’s the competitive process that matters, not the outcome. But we consumers could care less how balanced the competition between Ford and General Motors and Toyota may be. We want the highest quality automobile for the lowest possible price. That goal is not served by salary caps.

So ignore that idea, and focus on what Frank really meant. In discussing the happy days of the 1960s, he hypothesizes that increase in wages at every level of skill occurred because: “…it was a [labor] market tempered by a number of institutions. While many of those institutions do not exist today, they will return if public sentiment is strong enough.”

Is he saying labor unions? I guess he was afraid if he said the U-word we would all get worked up, so he went with salary caps instead.

But maybe there is a better way of saying it. Some employment contracts are mediated by anonymous markets in which there are many workers bidding for the same work and many employees offering to hire workers to do the same tasks. Other employment contracts occur in the context of long-term relationships. It’s the difference between contestable versus negotiable. It’s dating versus married.

If you are reading this, I am pretty sure you have a secure negotiable job and you don’t lose sleep over the possibility that you will be replaced tomorrow because someone in the morning will offer to do your work for $1 less. You are special and your employer knows it. Your employer is special and you know it. You are both secure in that mutual knowledge.

Though we call the frictionless supply and demand model “perfectly competitive” it isn’t perfect at all. It’s highly insecure. It’s so insecure that neither side of the contract has an incentive to invest in relationship-specific assets. No children without marriages.

What we need more of in this country are relationship-based negotiable jobs. Send the contestable market jobs to China and India. We need to find ways to encourage marriages between workers and employees who are only dating (i.e. temporary work). And we need to help workers and employers maintain the marriages that are already formed. Training and education help. Getting health care and other benefits off the back of the labor contract is a good idea too. Who would want to marry that fellow if you had to pay for his health care and his family’s health care, and take care of his retirement too?

Here is what Frank meant to say: Frictions are our friends.

Homework: Are the creative jobs that Richard wants us all to have secure or insecure?

Proposal: Every time that Richard writes the word “creative” he has to buy a round of drinks.

Also from this issue

Lead Essay

  • In this month’s lead essay, Richard Florida, bestselling author of Rise of the Creative Class, argues that the old industrial era has given way to a new creative era. Science and technology, art and design, and culture and entertainment have superceded natural resources and industrial infrastructure as the key to economic success. Talent is now the key factor of production and winners in global economic competition will be those who can best deploy and attract it. However, the creative economy is a source of increasing inequality both within and between nations. Florida argues that the key to bridging the gap between the creative and service sectors is to harness the creativity of service sector workers to make their jobs both higher-paying and more satisfying.

Response Essays

  • In his reply to Florida’s lead essay, George Mason economist Robin Hanson argues that creativity matters less for economic growth and the future of work than Florida thinks. According to Hanson, Florida’s emphasis on creativity distracts us from the prospect of a truly revolutionary change to work and economy just over the horizon: rapidly exponential growth driven by smart machines. “An economy with intelligent machines could grow very rapidly indeed,” Hanson argues, “and induce rapidly falling human wages.” Will we be prepared if we’re busy making the Creative Class comfortable?

  • MIT economist Frank Levy agrees that creativity is more important than ever in a world where computers and foreign workers can do routine work less expensively than domestic workers. This shift, Levy says, requires better education in problem-solving. But education can only do so much. The gains from rising labor productivity are going largely to the wealthy, Levy argues. Unless policies and norms are reinstated that spread those gains more widely “all of the nation’s institutions will be at risk.”

  • While agreeing with much in Florida’s essay, UCLA economist Edward Leamer suggests that the key to understanding the future of work isn’t creativity, but talent. “Is a personal computer like a forklift or a microphone?” Leamer asks. Forklifts are forces for equality, washing out individual differences in ability. Microphones, on the other hand, amplify difference in ability and talent. If training cannot create talent, but can only enhance it, the gains to training will be highest for the talented, and it will not be possible to close the talent and wage gaps by offering more training to the less talented.