By: Dividend Sensei
This week we’ve already looked at why wage growth is currently low but likely to accelerate within a year or two. We’ve also explored some little known facts about the labor market that might indicate great things ahead for workers, the economy, and the stock market.
Today I’d like to highlight one of the biggest problems that I, and many people have with the modern job market. A problem that causes a lot of unnecessary harm and angst for dislocated workers, companies, and the US economy as a whole. The good news is the bigger the problem the greater the wage, economic, and market rewards for fixing it.
Monopsony And Asymmetric Information
There are two interrelated problems many workers face today. The first is rising monopsony in the labor market, meaning too few companies are most of the hiring, at least at the local level. There are over 28 million businesses in the US but due to the hyper local nature of the job market the hunt for meaningful work can be extremely frustrating. For example if you are a nurse in a small town with just one hospital you have just one place to look for work. If you lose that job you have precious few job opportunities that don’t result in you wasting your hard earned skills and education.
The other problem is asymmetric information also called information failure. Theoretically in a free market the price of labor (wages) would be perfectly represented by aggregate supply and demand. Of course the unique nature of each job, its requirements, and the fact that no two workers have the exact same skill set or experience mean that in reality there is a lot of friction between firms looking to hire and workers looking to get hired.
This makes the job market similar to the housing market, in that a lack of frequent market clearing transactions, coupled with the hyper local supply/demand situation (and fact that no two homes are exactly alike) makes it hard to know the exact value of any home until it’s sold. And since homes don’t frequently sell it means home owners and prospective buyers are stuck guesstimating approximate values using things like Zillow and broad surveys like the Case-Shiller home index.
The same is true for the job market. The good news is that thanks to the internet we have access to far more information about jobs, working conditions, and pay than ever before. For example SalarySurvey.com can give you the average, median, and even total (including benefits) compensation for hundreds of jobs nationwide, regionally, and even at the city level. And GlassDoor can provide useful insight into what working for a company is really like, as well as an estimate of what your “market wage” is in a local area based on your qualifications and experience. But the fact remains that job hunting in modern America is still a major hassle. I know from personal experience from a few years ago, and because my father has dealt with his fair share of job hunting in recent years (he’s been working as a contractor for several companies while looking for a permanent position).
So I’m well acquainted with the inefficiencies (frictions) of the job search process, which isn’t just bad for workers but companies and the economy as well. For instance according to the Bureau of Labor Statistics last month there were a total of 6.6 million job openings in the US, an all time high. That’s compared to just 6.4 million unemployed (those actively searching for a job within the last month) people. In other words for the first time in nearly 20 years there are more jobs than people looking for jobs (at least by that narrow definition).
Companies are increasingly finding it hard to fill their positions, leading many economists to warn of a dangerous workers or skills shortage. In reality of course there are tens of millions of Americans not in the official labor force (per government definition) that could easily fill these positions and help companies, the economy, and their own income grow. But the issue is that, despite the rise of internet databases and sites like Monster.com and LinkedIn, matching workers with companies looking to hire is an arcane and terribly inefficient process.
In fact as my father (and anyone who has been unemployed) can attest, looking for a job is a full time job in and of itself. You spend countless hours scouring online job sites and sending out your resume to hundreds of companies that list job openings. In addition you hunt online for openings listed on major corporate web sites. Sometimes you cold call companies or even physically stop by a business inquiring if they are looking to hire. People often use agencies to help locate work, just as companies use head hunting firms.
Depending on what city or state you live in and your profession, it can sometimes take 1000 applications and dozens of interviews, over a period of six months, to land a single offer. And often that offer can be disappointing, such as for a six or 12 month contract that means that you’ll be repeating this hellacious job hunt dance relatively soon. The tragedy of this is that with 6.6 million job openings now, and around five million being created each month (in the US alone) there are plenty of jobs for anyone who wants to work. The trouble is that matching employers with potential employees is currently analogous to researching through physical libraries to find the answer to a question instead of using Google.
What is the solution to these combined problems of local monopsony and information failure?