Riskgaming

The Unseen Forces Shaping America's Labor Market

Description

Strikes, work stoppages, industrial actions. It's 2023 and America's labor force is up in arms. But what's driving this isn't artificial intelligence or COVID, but rather fundamental theories that economists have noted for decades. What are they?

The first theory is the concept of "superstar economies" or "tournament markets," which was introduced in  economist Sherwin Rosen's 1981 paper. In these economies, small differences in quality between workers can lead to exponential wage returns, thanks to the power of broadcast technologies. This has resulted in extreme income inequality between a few winners and the rest of the workforce.

The second theory is William Baumol's 1967 paper on "cost disease," which suggests that different jobs ultimately compete for the same talent and therefore have to offer equivalent compensation. We use the example of the U.S. military struggling to recruit soldiers and the ongoing Hollywood writers and actors strikes to illustrate how these theories are manifesting in real-world scenarios.

Transcript

This is a human-generated transcript, however, it has not been verified for accuracy.

Strikes, work stoppages, industrial actions. It's 2023 and America's labor force is up in arms. But what's driving this isn't artificial intelligence or COVID, but rather fundamental theories that economists have noted for decades. What are they? Let's dive in.

Let's turn to the concept of superstar economies or tournament markets, which are described in  Rosen's seminal 1981 paper. Superstar economies exist where small differences in quality between workers can lead to exponential wage returns due to the power of broadcast technologies. These superstars belong to a tournament. They all start at the beginning, and the biggest winners make extraordinary salaries. You play to win. Income inequality between the handful of winners and everyone else is extremely wide. What's happened in America is that the superstar economy has expanded far beyond traditional media or athletics to all forms of professional work. Superstars win, but the hollowed out economy limits opportunity for everyone else.

Now let's turn to a second important trend, and that is William Baumol's classic 1967 paper on what he would ultimately dub cost disease. Many workers are able to switch jobs, which means that jobs that might seem completely different ultimately compete for the same talent, and therefore have to offer equivalent compensation. These two trends, the superstar economy and cost disease, explains a lot of what we are seeing in America today.

Take for example the US military. America's military leadership has surely warned the past two weeks about the challenge of recruiting soldiers. The story kicked off back in March with a prescient overview in War On The Rocks, which summarized the situation simply as, the all volunteer force may finally have reached its breaking point. Why? The number of young people who are qualified to serve dropped from 29% to 23%. Military recruiters are competing directly with the restaurant in my neighborhood with a bold letter sign offering $25 an hour for starting workers, no violent warfare training hopefully required.

Now, take the example of the actor strike underway right now. It's a function of the superstar economy, where many people can see the winners of the tournament. But now with the rise of AI, the risk is that many of the people who don't make it to the upper reaches of superstardom will be left with practically nothing. We should expect more challenges in labor markets, because cost disease and superstar economies are intersecting and expanding, forcing more worker dislocations, more labor actions, and more complexity in work. No one orchestrates these labor markets. The effects emerge from the individual decisions of millions of workers, but those micro decisions aggregate to massive macro shifts that the US must confront head on and soon.

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