Several bloggers over the past week have commented on lethargic labor market movements as cause of economic decline. Adam Ozimek here argues that the docile job market is possible cause of stagnation. More acutely, Evan Soltas suggests that slow churning increases economic frictions and deepens the long-term unemployment crisis. Most interestingly, Ryan Decker notes that “churning is costly [and] if churning is declining for good reasons, we should applaud it. But that may not be the case.”.
What is see lacking across this discussion – in the long view – is a consideration of how new structures and and Internet have permanently altered what “economic dynamism” is, and how it can be measured thereof. We might call the switch to this new world a “reset”, as per Tyler Cowen. As I discuss here, the most notable economic development seems to be an increase in the stock (as opposed to bond) component of human capital.
To understand the potential impact of the Internet, start with this seemingly irrelevant 2007 paper from Hoyt Bleakley and Jeffrey Lin, “Thick Market Effects and Churning in the Labor Market: Evidence from U.S. Cities”. Bleakley and Lin suggest thick labor markets encouraging deeper and broader churning are causally-linked with agglomeration effects and hence wealth:
These results provide evidence in favor of increasing-returns-to-scale matching in labor markets. Results from a back-of-the-envelope calibration suggest that this mechanism has an important role in raising both wages and returns to experience in denser areas.
I don’t see many bloggers considering the Internet as an urban agglomeration. In the old days of manufacturing, agglomeration markets derived primarily from physical proximity. However, the idea of urban scaling is theoretically captured (see the Santa Fe Institute on cities or Geoffrey West on the surprising math thereof) with the idea that as the number of inhabitants double, the total number of interactions more than doubles. This generates a superlinear scale on opportunities for innovation, creativity, and dissemination of information (as well as violence and pollution).
But we don’t need physical proximity for creative collaboration, anymore. Twitter murders the intellectual distance between two parties, allowing for rich propagation of information, as well as creative speculation thereof. I see job offerings for remote positions advertised on my timeline, and too see the violence and incivility one would expect of a large physical gathering.
Cities allowed grand old factories to capitalize on economies of scale. But as the factory share of our economy shrinks, the Internet will become the driving force of most economic agglomeration. (I’m not as confident that the Internet will ever replace San Francisco or Manhattan as the hubs of social agglomeration).
Take etsy.com. I live in India, and know someone that weaves traditional handicrafts here and sells them for a good markup to an American market. The distributed apparatus handles shipping, handling, and any similar frictions. Outlets like this are making labor as mobile as capital. Indeed, part of Tyler Cowen’s “reset” world is deep factor price equalization in some industries. (A plumber’s service is not mobile, for example).
But as the labor market moves online, jobs are sourced through Craigslist the concept of quitting, firing, and hiring is shaken completely. Ozimek’s measure of dynamism through labor market churn will begin to capture an increasingly smaller aspect of the American economy. If you read the Harvard Business Review, you’re probably familiar with “supertemps” who are high-end professionals by definition in constant churn. Networked labor markets (on steroids via the Internet) make this a reality.
That’s the top 1%. But I believe cheap forms of Craigslist service are on rapid rise among the poor, too. Incorporated self-employment is on the decline, but what of forced entrepreneurship and dogsitting made possible because of the Internet? What of the sharing economy?
There are both cyclical and structural policy implications:
- Flexible labor markets suffused with social insurance should take the form of strong unemployment benefits and reemployment credits, the latter scaled by length of unemployment.
- Minimum wage restrictions will become increasingly irrelevant. A basic minimum income, on the other hand, less so. (This is another post, but I don’t think America is yet rich enough for the UBI we need, but will be soon).
- Increasing frictional unemployment encouraged by a discount version of unemployment benefits offered to “quitters”.
- The emergence of government-handled job auction markets as a means of depression management.
The Internet is a city that’s growing faster than New York or Mumbai ever did or will. This is the reset. For not much longer will quits+separations be a reliable statistic on job market health. Indeed, the Beveridge curve shows a weak economy in need of rejuvenation, but this is the dreamtime for the old labor market. Something new is coming. I think for the better.