In my contribution to the 3rd-way economics debate on 17th July (listed
under "Natalie Thorp"), I argued that shareholder capitalism and
competitive markets could deliver a "stakeholder society", where the
stakeholders in a business - the employees and customers - become the
investors and owners, and thus exert influence on its strategic management.
This would be practically implemented through indirect share ownership via
a competitive investment trust market for employee pension funds (or
"superannuation"), with employees choosing trusts that strike the desired
balance between investment returns and employee working conditions (or
customer service). (Although having used the term "balance", note also
that good working conditions (and employee and customer "loyalty"
incentives) often actually lead to a more productive and profitable
business.) The state pension would be replaced with these personally
chosen trusts, though still supported for the poor by Government
contributions (paid into the trust BEFORE retirement). In addition to
employee-friendly company stewardship policies, I argued that these trusts
might also offer job-seeking services, for when company progress (or even
survival) is incompatible with maintaining employment levels.
In this contribution I will focus on this idea of employment agencies, and
their role in providing "full employment" in a world of rapid change and
increasingly flexible labour markets. A key consideration for any "3rd
way" is how it fits in with (rather than fights against) the existing trend
towards increasingly flexible labour markets (as well as how it addresses
the issues of unemployment, pensions and capital markets!). I conclude
with a proposal to allow (more continuously progressive) income-tax
allowances and liabilities to be "rolled over" from one year to the next
(so tax is perhaps assessed on a lifetime-average salary basis), in order
to make a tax break out of voluntary periods of "unemployment" in-between
jobs.
First however, I feel it is necessary to consider the fundamental nature of
the unemployment problem. In my view the task is to manage change (It's
easy for a "command economy" to provide full employment, but it won't
respond efficiently to change.). i.e. Businesses rise and fall as
fashions, ideas and technology changes, and their demand for labour rises
and falls accordingly. Thus as workers move from one industry to another,
periods of unemployment in-between are inevitable. The task then is to
share these unemployment periods around evenly.
The conclusion of this logic is that attempts to share the "available work"
around evenly by encouraging part-time work (as so much espoused in this
Nexus debate) really don't address the fundamental issue. Doing the same
thing for life, but slower, doesn't address the need for more rapid change.
When an industry's relevance in the world lasted a lifetime, jobs could do
likewise. What we need to do now is to do one thing fast, and well, but
for a shorter period of time (e.g. 5-10 years), and then move on to
something different. So in contrast, by causing everyone to experience
their fair share of unemployment between jobs (which can be used for
retraining), flexible labour markets do address the real issue. (At the end
of this essay I offer further support for flexible labour markets and
criticism of the part-time work approach.)
It is this failure to come to terms with flexible labour markets in an era
of rapid change that has resulted in the present Australian election
campaign in which neither side has any idea as to how to solve the
unemployment problem - with one side still offering the absurd proposition
that tax cuts and economic growth will deliver the jobs (Why then have
decades of economic growth not reduced long-run unemployment? One can more
readily argue that growth, driven as it is by increased business
productivity (more value for less labour input), will actually increase
unemployment!), and the other side calling, like King Canute, for increased
job security (forgetting that security for those presently employed makes
it that much harder for the unemployed to break into the jobs market).
In fact, in the last few days the election campaign has raised an
interesting subtlety about the developing employment agency market, with
the recently privatised and broken-up "Job Network" service receiving
condemnation from employers as "too expensive", and Woolworths stating
(although denials are being aired as well now) that it would instead use
its own in-house applicant records to source labour. Why should Woolworths
be able to provide this service for themselves cheaper than the Job
Network? - because they have valuable in-house knowledge that assists them
in this task.
Yet over the last decade hasn't the entire economy been subject to a
whirlwind of "outsourcing" and "downsizing", as companies focus on their
"core competencies" and contract out ancillary services (such as
recruitment) to specialised 3rd parties that provide this service to many
other companies? Yes it has. And who has been dispensing this management
wisdom? - management consultants - firms such as McKinseys, offshoots of
the big accountancy firms (Andersen's, Price Waterhouse Coopers, etc.) and
independent business "gurus" (including Charles Handy, whom I referred to
on company federalism and employee stakeholding in my previous Nexus
contribution).
But at the same time as these consultants have been raking in millions for
this advice, many have also been securing the contracts for the outsourced
services! Now these same consultancies are talking about the value of
long-term relationships with their clients in this new field of activity
they refer to as (amongst other jargon) "business process management".
Does this mean they are retracting their original advice? Not really,
because their contracts are still temporary (though for several years), and
are for providing a service, rather than for a given number of permanent
jobs. There is thus continual pressure on them to continually reduce costs
in the provision of this service, which means, if the company they serve is
not growing sufficiently fast, a continual reduction in employment demand.
However, all good management consultants know that an important part of
their job is to continually persuade their client of the need to re-employ
them for further studies, and a good way of obtaining these future
contracts is to develop close personal relationships with the company's
management, and to develop a strong understanding of the company's
business.
Thus management consultancies have developed to form a number of strong,
long-term (but voluntary) relationships with a restricted number of
companies, looking after their non-core competencies, continually providing
high-level strategic advice on how to change their business for the better
(to grow and increase profits) and helping them manage the process of
change ("change management") - in particular, persuading reluctant
employees of the benefits of change, and retraining them for the new
processes.
One advantage of being in this position with a number of companies is that
when the change required unavoidably means redundancies, they have the
ability to help the losers of this change find new jobs with their other
client firms (those that are expanding so fast as to require new labour).
In other words, these consultancies act in these cases as employment
agencies (another growth industry predicted by the guru Charles Handy), and
because of their close contacts with other firms (and knowledge of their
needs), can do so very efficiently. It is in their interests to provide a
win-win situation for company and employees (i.e. by finding redundant
employees new and BETTER jobs), because this makes it easier for them to
carry out change (minimising redundancy payouts too), thus delivering
positive results to their client and helping them secure future contracts
for further change.
In many cases, the consultancies securing "business process management"
contracts will take over their client company's permanent employment
contracts (you don't have to be a high flyer to get a job with a top
consultancy firm anymore!), so they become in this respect, a "labour hire"
company (such as that established in the recent Australian docks dispute)
that takes on the risk of finding work from the employee, and rather than
supplying a fixed service with this labour (like traditional companies),
instead provides this labour for a variety of tasks in the market,
according to the changing needs of the market. Essentially the labour-hire
company provides employees with generous unemployment benefits (the same
pay) between jobs/contracts, financed by a cut in the salary that employees
would otherwise get for a temporary employment contract. Additionally, for
taking on the risk and effort of finding new contracts (which the employee
doesn't want), the company also takes a cut as profit.
Why have I described all this? Because these management consultancy firms
provide the very service that I suggested (in my earlier contribution)
unions might provide as "Employment Service Companies" (ESCs) - taking a
close interest in the strategic management of the company (previously
suggested in the capacity as major shareholders), and even suggesting
redundancies when they are able to secure new employment for their
customers (employees of the company). When this factor is incorporated
(the need to help the losers of change), the decisions about change made by
the Consultancies/ESCs almost become based on a full societal cost-benefit
analysis. (i.e. It is only desirable to have redundancies if the resulting
gains to the company are greater than the costs of retraining or
compensating those made redundant.) Note also that ESCs may have a
competitive advantage over present consultancies, by being able to offer a
source of (employee share) finance for investment along with their
strategic advice. Since the ESC will understand the business and have
confidence in the strategy, they will also demand lower risk premiums
(dividends) than the "external" stockmarket.
Importantly also, this strategy of the consultancies is extraordinary
successful, with these firms growing over the last decade or so at annual
rates of 20% or so, and producing legendary salaries for their top
performers. Not only that, they typically deliver even bigger benefits to
their client companies. The strategy these consultancies have developed,
which includes managing change and providing employment agency services, is
a commercial winner!
How do these consultancy activities relate to the "3rd way"? Partly,
because it is a service that ESCs/unions/investment trusts may develop to
provide, and these organisations will support a "3rd-way" stakeholder
society (comprising federal companies in which the central management is
accountable to indirect employee shareholders via the employees' chosen
trust/ESC). But these consultancy activities also relate to the "3rd-way"
in that they also adopt the 3rd-way balance between left (central
management of change) and right (devolving this power from Government to
competing consultancies). Devolving the management of change and job
searching all the way to the employee (the extreme right position) goes too
far (in most cases), because people need help with job searching (so they
can focus on their own core competencies!). A central command economy goes
too far to the left. A compromise is the best solution, and the market is
(gradually) working towards it.
But how does this solve the unemployment problem? Yes, flexible labour
markets are a precondition to spreading unemployment around fairly, but
what is to stop those presently employed continually changing jobs, whilst
the unemployed remain stuck in a rut? Two things: (1), the way employment
agencies will choose new recruits, and (2), the preferences of the
employed.
Considering the second factor first: What concerns me about the Nexus
debate so far is that flexible labour markets seem to be viewed as a
threat. I view them as an opportunity. Like many young people, I have
little desire for a permanent job in one company for life. I like variety.
I also like to take time off in-between jobs. In other words,
"unemployment" can sometimes be desirable, e.g. weekends or holidays, or
alternatively, if "part-time" work is to solve the unemployment problem,
its definition needs to be broadened. What people want is not job
security, but rather, INCOME security.
The thing that makes it difficult to quit a job and take a break though, is
the difficulty involved in finding a new one when necessary. Thus many are
stuck in a job they don't enjoy, working excessive hours, wanting a break,
but being afraid to quit in case they can't find anything new when they
need it. The lack of job market flexibility (or "liquidity") becomes
self-fulfilling. But if employment agencies made it easier for people to
find new jobs then they would be more likely to quit in the first place,
and thus provide the opportunity for an unemployed person to get into a
job. (Interestingly, this principle of making it easy to change your mind
in order to encourage the original decision is also the highly successful
basis of share investment.)
An added bonus of the greater ease of finding a new job would be the
increased bargaining power of employees in their present jobs. Thus not
only can the scenario described help people cope with (and even enjoy)
flexible labour markets, it could also lead to improved working conditions
in existing jobs (especially when management is influenced by ESCs with a
major shareholding).
The other factor to suggest employment agencies will prefer to select
recruits from the longer term unemployed rather than those recently
employed comes from (an admittedly optimistic) consideration of the fact
that unlike an employer recruiting directly (who merely wants the best
applicant for the job), employment agencies have the additional objective
of wanting to keep their customers happy, so that their customers stay with
them (and continue to invest with them in the case of ESCs/investment
trusts).
Therefore, given the choice between two otherwise equal prospective
recruits on their register, where one has only recently left a job and
started looking for alternatives, and the other has been unemployed for
much longer than they would like (and so is more keen to find work), the
agency will maximise its total customer satisfaction by placing the latter
in the position available. i.e. They will operate a first-in, first-out
queuing principle.
In contrast, if an employer chooses a new recruit directly, they will have
a bias towards selecting the most recently employed person (i.e. last-in
(to the unemployment queue), first-out), in the belief that "there must be
something wrong with the longer term unemployed person, otherwise they'd
have a job by now" (and because unlike the agency, they suffer no loss from
the failure of the long-term unemployed to get the job). Consequently, as
occurs at the moment, the long-term unemployed can get stuck in a rut.
In the case of direct applications to employers therefore, some
enlightenment on the part of employers may also assist the long-term
unemployed. Unfortunately, at present employers seem to want things all
ways - they want flexible labour markets (i.e. to be able to sack people at
will), yet on the other hand, they view with suspicion any potential
employee that has been out of the work force for many months (even
"education, education, education" will be beaten by experience). There is
a need for political leadership and enlightenment on this issue (as well
perhaps as tax or welfare incentives to preferentially encourage the
employment of those that have been out of work longest). Perhaps employers
will listen to the business guru Charles Handy, who advocates what he
calls, "chunking". i.e. working for moderate, but intense periods (or
"chunks" of time), followed by chunks of time off.
One can well argue that "chunking" maximises an employee's productivity -
unlike the so called "work spreading" approach of part-time work, it fits
in with the (largely successful) philosophy of "work half as many people
twice as hard, for twice the salary and three times the output value", yet
also helps avoid "burnout" and provides for continuous motivation by giving
people extended breaks.
Although one can also argue that if breaks are too extended people get out
of the habit of hard work and find it difficult to get back into the swing
of it, "chunking" is certainly more efficient than part-time working. (The
corollary of the above philosophy is that half-time work produces less than
half the output value.)
So in response to Tom Walker (in a contribution to Nexus earlier this
year):
> In other words, there is no _actual_ need for a change to public tax
policy other than to bring something to the attention of employers that
they seem not to have noticed, namely price signals.
You have got to be kidding! You're not seriously suggesting that intensely
competitive businesses assisted by the multi-million pound taxation
accounting industry haven't noticed a way of reducing tax are you?!!
There are very good reasons for employers "systematically and chronically
ignoring price signals in the labour market" - they are acting on much
stronger cost signals resulting from the inefficiencies of part time
workers. The above argument is similar to saying, "Why pay one manager
$200k net, costing an additional $200k in tax (50% top rate tax), when you
could pay ten part-timers $20k net each with only $100k extra in tax ($10k
each at 33% on $30k gross)?" The answer is, it's a lot more efficient to
have one person doing the job.
Considering then the proposed promotion of part-time work through a "Work
Spreading Tax" levied on employers (which is identical in effect to the tax
free allowance and progressive income tax, because income tax is still
ultimately paid by the employer), not only does this fail to address the
fundamental unemployment problem (management of change), it fights (and
loses) against much stronger factors in the real economy. We will do far
better at managing change if we go with the trends, rather than fighting
against them.
So what we really need to encourage instead is "chunking". However, whilst
yearly tax assessments do encourage short-term "chunking" to a small extent
(e.g. 10 months pay spread over 12 months may reduce your average monthly
salary to a lower tax bracket), they do not (as far as I know) encourage
chunking over a period of several years, which is probably a more efficient
way of chunking.
However, if income tax liabilities and allowances could be "rolled over"
from one year to the next, so that, for example, the tax on four years'
salary plus one final year of "unemployment" (equivalent to, but more
efficient than a 4-day week) could be calculated on the average salary over
5 years, this could reduce the taxable salary to a lower tax bracket. In
practice, a tax rebate would be received at the end of the 5th year.
Similarly, the period of "unemployment" could occur at the beginning of the
taxable period, thus encouraging people to spend time in education and
training (at low income levels).
Consequently, a tax break would be created (always politically popular!)
that would not only encourage people to take the break they'd so much like
anyway, it would also reward them for creating a job vacancy for the
unemployed.
Note that to maximise the chances of a person's salary moving down a tax
bracket (i.e. of the tax break OCCURING), the taxation system needs to be
made more CONTINUOUSLY progressive (but not necessarily more steeply
progressive, or with a significantly higher top rate, although this would
increase the MAGNITUDE of the tax-break incentive for chunking). i.e.
More, narrower tax-bands should be introduced.
Finally, since the period of tax assessment should be flexible, rather than
arbitrary (e.g. 1 year or 5 years), it might perhaps be extended to cover a
person's entire working lifetime (computer databases can handle this now).
A person would thus pay tax or receive a rebate each year, according to
their lifetime average salary. Then if the tax advantage of "chunking"
continuously diminishes with time, this creates an incentive to quit your
job and take a break sooner rather than later. Since everyone would like a
tax rebate sooner rather than later (if for no other reason, because they
can invest it (via their ESC!) and earn interest), this automatically
creates the desired time-diminishing (though continuous) incentive. It
also creates an incentive for those that have been in work longest to take
longer breaks when they eventually do so (because this will continually
reduce the lifetime average salary).
Here then are just a few, new economic policy proposals based on the above
3rd-way philosophy on flexible labour markets.
*************************
3/20 Gladstone St.
Balmain, NSW 2041, Australia
Tel. +61 2 9810 2304
Photovoltaics Special Research Centre
School of Electrical Engineering
University of New South Wales
Sydney, NSW 2052, Australia
Tel. +61 2 9385 5246 Fax. +61 2 9385 5412
Pager. (02) 9214 2721
e-mail: d.thorp@unsw.edu.au
The PV Centre's World Wide Web Site is at: http://www.pv.unsw.edu.au/
"If the job of a rebel is to tear down the old and prepare for the new,
then this is Noam Chomsky, a 'rebel without a pause,' the 'Elvis of
academia....' As rock 'n roll in the '90s continues to be gagged, it is
ironic that a man of 65 years turns out to be the real rebel spirit."
- Bono of U2
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