This rant is a culmination of this weeks key discussions and arguments from TheStartup Club meetup at Primo, and discussed in more depth with Geoffrey Kwitko at The Startup Club board meeting. Herein contains my final thoughts on the matter.
The traditional model is flawed. This model I am talking about is where by an employer pays an employee a wage in exchange for time and services. The employee is selling their time to the employer. This would probably be the most frequent and significant commercial transaction in businesses around the world, and it accounts for a significant proportion of the business' expenses (particularly in service industries).
I believe that through a great deal of social engineering and government intervention in the labour market have lead us to where we are today, which in my opinion is an inefficient market. A market where by remuneration is governed by age and years experience, most of you would know these as "award rates". These systems are not based on skill, merit or ability. It is rather naive to assume that ones merit, skill and ability are directly correlated to their age and years of servitude is it not?
The Economics of the Labour Market
In a typical free market economy, the forces of supply and demand are always at work, constant trying to reach equilibrium. For those of you not too savvy with your economics, try to keep up anyway, I am sure I am getting to a point. The greater the market demands a product (or in this instance service) the more that product is worth as consumers are willing to pay more to get it, conversely the weaker the demand for a product, the lower the price. The same goes for supply, the more supply in the market the cheaper it will be because suppliers will compete against each other to capture the limited consumers in the market.
When there is an irreparable problem within the market the government may intervene to stabilize it and return equilibrium to the market. The will then legislate to either induce or reduce the demand, by way of taxes and subsidies. Many of you would experience this in the $900 cheques you're getting in the mail. In some instances, the government may also do this to a perfectly healthy market in order to realise some social agenda, most notably Kevin Rudd's alco-pop tax.
Fundamental economics aside, I now challenge you to think about this. Forget the workplace and the labour market we have all become so accustomed to and imagine it as another commodity; like oil, Big Macs and iPods. In this market there is no government intervention; that means no award rates, no minimum wage, no industrial relations laws. The suppliers would be people selling their skills and services the consumers would be businesses with a need for said services. In this market the business and the worker would come to an equilibrium on remuneration naturally, based on the true value of that person's skill and it's relevancy in the economy.
What's stopping businesses from exploiting workers and paying them $2 an hour?
Good question and this was the centre of much critical debate at The Startup Club. My answer was: social security. Don't get me wrong, you need to have a safety net. As capitalistic as I am, I still understand the need for a safety net. That safety net however, should exist through as social security network such as Centrelink, not in the labour market by way of minimum wage standards and award rates. Ergo the reasonable price the market would accept as a "minimum" wage would be a substantial amount above social security payments. So let's assume we can get $200 per week in social security if we're not working, if a business offered a job that paid $180 for 40 hours a week, no one would take it because they could get the same money doing nothing. Even if they offered $300 a week, few people would take that because it is only marginally higher than social security. Consequent the business is forced to make an offer of at least $400 before suppliers even think of playing ball. Even more so if there is a great demand for that skill set, or a shortage of of supply.
Won't somebody please think of the children?
This was discussed at Startup Club as well. I was told when I was a 15 year old teenager that the reason I was getting paid $6 per hour while a 21 year old in the exact same role got paid $21 per hour was because it was the, "only way kids my age can be competitive in the workforce." What a crock! If I wanted to be competitive in the labour market as a 15 year old kid I would rather negotiate a wage suitable to my skills. And lets face it, if it were a standardised unskilled position that required minimal independent thought, why should the 15 year old get paid any differently to the 21 year old?
But what about job security?
Interesting question, especially in today's economic climate, where people are losing their jobs and unemployment is rising. I propose this: business' lay off staff because there is a reduced demand for their business, so in turn they have a reduced demand for labour and so on. At the same time they are being forced into maintaining award standards, so they fire some staff in order to maintain the awards standards of others, despite the reduced demand for labour. What often happens is the staff left behind are suddenly doing a lot more work than they would like, because the business is understaffed, or in this instance under-supplied. What I have seen recently is unions stepping in to elect for a firm wide reduction of salary in exchange for job security. In this instance the business may be oversupplied for its present labour needs but it is only paying for the supply it actually needs and is thus sustainable in harder times. This is pleasing, because its a sign that the free market idea can work.
The market for lemons? What tha?
The market for lemons is an accounting theory for financial reporting in free market economics, it basically suggests that ASX listed companies will supply financial information irrespective of government legislation and regulation because if they don't investors in the stock market will regard that company as a "lemon" and not invest in them, consequently pushing the stock price down and hurting the company.
Similarly in the labour market, it is the best interests of the business to treat their staff well and pay them appropriately, lest the employee take there skills elsewhere to a higher paying employer.
So what's this got to do with merit?
I was getting to it, I swear. Let's go back to the example of the 15 year old and the 21 year old. Both now getting paid the exact same amount now, thanks to the liberation of the labour market. Let's now say that the 15 year old has shown exceeding promise in their entry level process job. They are efficient, punctual and are even helping out new staff struggling. This is where the 15 year old should be able to extract a greater amount of money from the business, lest they take their add-value skills and personality elsewhere.
Promoting a 15 year old over a 21 year old is unheard of and would be socially unacceptable in today's society, even if they are better. In what context does that sound even remotely rational?
I think I will wind it up at that, I have dropped some knowledge on you about economics and challenged your thinking about labour market. As usual; I encourage any feedback or rebuttal as I am just one a opinion in a sea of free thinkers.
Chris Hooper
(Innovate or Die)