The Labour Market: The Greatest Market Failure Ever – Part 1

“I became an actor by accident.”

– Christopher Walken

Yao Ming is 7 feet tall and weighs 141 kilos (at least during his playing days). He is China’s most famous sports hero, was the first Chinese player in the NBA, and an 8-time All-Star for the Houston Rockets. It is pretty likely that Yao Ming was in the right job.

In my own case, I stumbled into an Economics PhD program after doing a degree in Computer Science and Mathematics – why? Only because I thought I would learn something about how the world actually works. Of course, in pursuing my studies, I came to realize that “the real world” and “Economics” did not fit comfortably into the same sentence (at least not in 1987) and took the decision to not become an academic. In fear of hurting myself, however, I took my first steps into the real world, tentatively, as a Strategy Consultant, strategy houses being among some of the real world’s halfway houses for academics. Subsequent steps have taken me from Canada to the US, UK, France, China, back to the UK, and now to Nigeria (all serving as home bases for work in many more countries), and from consulting to investing private equity, to line management, and back to consulting. As exhilarating as the ride has been, it has also been completely random.

In March 2003, I found myself as the General Manager of Beijing United Family Hospital, China’s first and premier international standards hospital, at the beginning of the SARS crisis. I had visited China for the first time in 1983 when that country did not have a single private vehicle, had essentially no private enterprise, and did not register on the world economy. In April 2003, I was staring out my office window at a stream of (very frightened)¹⁾These patients had been travelling companions of Pekka Aro, director of the skills development department of ILO, who had died of SARS the previous day in Ditan Hospital in Beijing. A tribute to Pekka can be found at the Industriall Global Union website, here: Tribute to Pekka. Accessed July 29, 2020 patients being screened for SARS. We were in the middle of a global crisis, with our hospital at the centre of the outside world’s interaction with the secretive Chinese. We did not know whether 1,000 or 100,000 or 10,000,000 people would die. The long road from my modest circumstances in London, Canada to this scene could not have been part of any meaningful plan or calculation.

And I’m not alone. Ask anyone how they came to do what they do, and you’ll inevitably hear a tale of randomness.²⁾Apart from a few tennis prodigies, and the sad career of Todd Marinovich, trained from birth to be an NFL quarterback, which did not work out so well. In a recent conversation with a friend, I discovered that his 30-year career resulted from the fact that Japanese was the most conveniently scheduled class for his language requirement.

The choice of career and daily occupation is among life’s most important decisions (up there with choosing a spouse, opting for children, and deciding to divorce). And yet, for many, the way these decisions are made sometimes seems to take less effort than planning for the weekend’s activities. More importantly, once one starts down a certain path, our ability to change careers as we grow and change is severely limited – the range of future possibilities is highly restricted by the past. There is not enough flexibility in the structure of our labour markets to easily change course, once one starts down a path, and these restrictive consequences of hastily made (or made with limited information) decisions are not easily understood at the outset.

Why is this, and does it matter?

Let’s start with the second question first. Yes, it does matter. It matters because flourishing would be increased if more people were able to construct a career path that closely matches aspirations and (changing) desires over the long-term. And given the centrality of one’s work to identity, self-esteem, connectedness, and happiness (all a part of flourishing), a significant improvement in the capability to manage one’s work life over the long term has huge benefits. Too many people suffer regret over their careers – or miss out on something that would have been much more satisfying – and it’s worthwhile to figure what can be done about this.³⁾While a quick internet search reveals thousands of sources about career dissatisfaction globally, one 2011 US Gallup Poll provides a simple slice of this bounty of data: Nikki Blacksmith and Jim Harter, “Majority of American Workers Not Engaged in Their Jobs,” Gallup, October 28, 2011. Accessed July 29, 2020.

So why does this happen? As with most things, there is no single cause. We believe that two of the most important reasons are a complex interaction between information failure and certain realities about people.

1. Information failure – It’s not possible to understand at 18 (or 21 or 30) the outcome of various career investments⁴⁾There has been an interesting series of lawsuits in the US where Law School graduates have sued the Law School because the promised high-paying job market did not exist when they graduated. See Joe Palazzolo and Jennifer Smith, “Law Grads Claim Schools Misled,” in The Wall Street Journal, February 22, 2012: Grads Misled. Accessed July 29, 2020. you could make for your career and the risks/rewards of various choices. I’m not talking here about the basic (and well understood) fallacies of decision-making (anchoring, perceptual biases, etc.). Career choices are subject to a much farther reaching and deep phenomenon, along the lines of Rumsfeld’s unknown unknowns. Essentially, one pays attention to what is observable and proximate, but the options that are created by certain decisions are largely invisible, and the individual does not (perhaps cannot) take these into account.

2. Realities about people – People grow and change over time. But our ability to understand the desires of the future self, or even that a future self (with different preferences than the current self) will exist at some time. You may enjoy doing something (such as styling hair) at age 25 that your 45-year-old self will find tedious, possibly even laborious. But this is something you don’t know at 25.⁵⁾Derek Parfit wrote a wonderful book basically about the fact that self is not a constant, and the degree of overlap diminishes over time. This has all sorts of implications for ethics and decision-making that we have not fully considered. And because you don’t know this at 25 – that you will be different at 45 and desire different things – you don’t create the options that would allow you to do different things at 45 (or 65). I know many seemingly successful people who by age of 40 have narrowed their career options and will not easily be able to change what they do, even if they want to; they will essentially continue to do what they are doing now (albeit, possibly at a higher level). As one person put it to me when I asked why he didn’t change his job after 25 years at a (British) magic circle Law Firm: “I don’t think I would be good at much else.” Another way to express this is to say that the younger self has great difficulty evaluating the option value of creating the possibility of changing career paths in later life.

The result is career decision-making that is too linear and too risk averse, that does not recognize the value of options for a changed self in the future, and that does not provide enough long-term flexibility to respond to personal growth and development.

Making this all the more challenging is that:

• We’re living and working longer. And so, like a chess game, the number of potential outcomes explodes as the number of moves increases. Decisions made at 20 affect the option set at 60.

• Our aspirations toward a good life in the developed world are higher and higher. It’s not enough to simply survive. Given our stage of development, people should flourish.

Finally, an important contributing factor is an economic system (at least in North America) that encourages debt (mortgages, student, and consumer debt) and reduces future option sets for career changes. If you have children, a mortgage, and student debt, the ability to shift careers (which often requires investment) rapidly reduces to zero.

When you combine all this, we have the mother of all market breakdowns. You don’t know what the Future Self will want; you haven’t planned out very well what the Future Self is capable of doing; the planning horizon is getting longer and longer; and any type of planning is fraught with a degree of uncertainty that is unknown and unmanageable. Moreover, it’s very difficult to shift direction mid-career. God may allow u-turns, but the labour market is not so forgiving.

So where does all this leave us? If the Labour Market is the greatest market failure, then it demands a more vigorous public policy response to address this as well as we can: a public policy response that recognizes the need for flexibility throughout one’s working life and so fosters flourishing. Nevin and Neill believe that this public policy response will have at least 5 elements:

• Re-orient the education system to ensure that students learn how to adapt. Rapid changes in the world and increasing longevity combined with flourishing’s demand that people grow and change means that whatever you are doing at 25, you will not be doing at 65.

• Revamp tax structures to encourage income smoothing and more flexible career paths.

• Restructure the post-secondary education funding model to reduce fixed debt overhang on graduating students by more contingent income payback schemes or more public funding.⁶⁾It is surely worth discussing whether it’s right that children with wealthy parents graduate from university free and clear (and so have an enormous advantage in flexibility going forward) while children of parents of modest means have in many cases large debts that severely constrain choices. And, as we are seeing now, this economic structure is hurting the broader economy: students with large debts are delaying entering full adulthood and are depressing aggregate demand as they do not buy houses, furniture, etc.

• Create a greater ability to move between careers by developing a series of well-defined, skills-based modules (with certifications) available at any age and that provide clear standards and curriculum recognized by employers.

• Develop a national database of labour underpinned by solid analysis that shows – with as much granularity as possible – what jobs and professions have and will have increasing demand.

• Work with the largest corporations to develop more flexible working arrangements for older workers, arrangements that allow the corporation to gain from the maturity and experience of the older worker but recognize that desires and capacities of these older workers may be different than those of younger workers.

And, of course, consistent with our belief that what gets measured gets done, improving the labour market to increase flourishing needs to be tracked.

What we don’t believe is that raising the retirement age as a policy tool is helpful. The reason for this is that rich people live longer than poor people. So raising the retirement age for a state pension is essentially a massive transfer from poor to rich people and an evil public policy. We say more about this elsewhere.