Fungibility is a feature of a good where two items of that good are so close in their features that they equal substitutes. Currency is the ultimate example. If I lend someone $50 it doesn’t matter to me whether that same $50 note is returned, or another equally good $50 note. Other fungible goods include standardised commodities like wheat, raw metals, oil.
But is labour the same?
I doubt many businesses would be happy to lend an employee for a few days work elsewhere then receive a different person back when the job is done. While there are people with very similar skills and experience who may be suitable substitutes, this is not the case in general. The idea that some workers are subsitutes for some others, but all workers are not substitutable, forms the great divide between the policy prescriptions of the Austrian economists and the Keynesians, and may be one reason for the apparent failure of Keynesian stimulus to ‘create’ jobs in the US. It also explains why labour costs in some industries can rise even with relatively high unemployment.
For example, this George Mason University survey found that only 42% of the workers hired under the American Recovery and Reinvestment Act (ARRA) where previously unemployed, while the rest either switched from another job (47.3%), came straight from school (6.5%) or came from out of the workforce (4.1%). They concluded –
This is far from the ideal prescribed by Keynesian macroeconomics. In the Keynesian ideal, spending should be targeted toward the slack sectors, and workers should overwhelmingly be hired away from unemployment lines. Instead, the direct job-to-job shifts for ARRA-receiving organizations were similar to the average job-to-job shift rates in the U.S. during normal economic times.
In short, unemployment remains high because the type of skills the unemployed have are no longer in demand, even if you throw more money around the economy. However the study received quite a deal of criticism online, with one counterargument neatly summarised below.
Let’s ponder this. Suppose Company A creates a new job, and fills it by hiring a worker away from Company B. What do the authors suppose think happens to the job at Company B? Do they say, well, that’s it, we lost Joyce, nothing we can do about that in an economy with unemployment at only 9%.
So who is right? They both are to some degree.
The best analogy used to describe the labour market is that labour demand is like a puzzle, and the workforce are the pieces. Each puzzle piece is a particular shape, just like each worker has a particular set of skills. And each potential job is a space for a particular shaped piece. While some of the puzzle pieces are so similar they can be used in multiple places, others are so uniqe that there are just a few spots for them in the workforce puzzle. You can’t just substitute one puzzle piece for another. In addition, as the labour market becomes more specialised fewer puzzle pieces become directly interchangeable.
The importance to of the ‘job market as a puzzle’ idea for governments considering economic stimulus is best explained by the following comment from Tyler Cowen’s blog post on the topic.
It is maddening to hear ‘workers’ talked about as if they are interchangeable – Oh, a whole bunch of home construction workers have been layed off? Don’t worry, we’ll build a road or a bridge and employ them!” The only problem being that the type of construction home builders are trained for has nothing to do with bridges. Perhaps people like those in the Obama administration lack the appreciation for the real complexity of these jobs and assume that any blue collar work is trivial and interchangeable with a little retraining, but it’s not the case.
Not only that, but the people who can start a project are very different than the people needed to bring it to completion, and in general the people needed at the beginning of a project are the least likely to be unemployed. In fact, even in a recession there is a shortage of such people. So it was predictable as rain that new stimulus projects would have to scavenge project leaders, architects, managers, and senior engineers from other existing projects that may have more value. It was absolutely, 100% unavoidable.
Not only that, but it is incredibly destructive: Pulling a manager from an existing project can cause damages far exceeding the salary of that person. If a project manager or architect is enticed away from a project that has a $100,000 per day development cost, and his leaving causes a month of delays while a new manager is found and brought up to speed, that’s a cost that will never show up in the stimulus accounting – but his $150,000 job will be counted as a ‘job created’. No one will know that in addition to the stimulus money used to hire him, the real cost of that job was an additional $3 million dollars. I’ve never seen a single Keynesian model take that kind of destruction of existing projects into account or try to quantify the effect. You’d think this might be important to consider – especially in an era where specialization is so important, where even low-level positions require specialized training.
It was also inevitable that some of the people hired would be pulled out of retirement – when you need top guys, you’re not going to find them in the unemployment line. You’ll find them sitting on their sailboats in the Carribbean.
The above quote suggests that Australia’s fiscal stimulus, particularly the school halls program, was well targeted to create space for the appropriate housing construction labour puzzle pieces. But for me, the nature of the labour market as an intricate puzzle leads to questions about education and training. How do redundant puzzle pieces reshape to fit the new puzzle spaces? Is on-the-job training going to help people reskill more quickly than the alternative of spending years undertaking costly skills training and education?
The appeal from business to increase the skilled migrant intake shows that many industries appear unwilling to train the workforce they require. There appears to be an expectation that appropriately skilled workers can be plucked off the shelf and placed perfectly in their puzzle. Indeed it was not uncommon to hear that a skills shortage would undermine an Australian economic recovery.
The great irony here is that in growing areas of the economy, particularly mining and gas, experienced workers can only be found from within the industry. Unless someone is offering the necessary training, businesses in the expanding industry will find themselves outbidding each other for the same pool of workers. Any company aware that the industry is expanding rapidly would be wise to have succession plans and internal training programs in place to plan for this highly predictable competition for workers. While internal training can be costly, industry cooperation in training can lead to genuine long-term benefits by providing a ready supply of appropriate puzzle pieces.
As Australia adjusts away from the retail, tourism, housing and education led economy of the early 2000s these considerations are important. Where the new economy is heading I don’t know, but it is likely to be one with a much larger mining and gas sector, and much smaller housing construction (incl. real estate services) and retail sector. These adjustments will require many people to change industries and reskill, and if the boom industries of the next decade don’t get in early to train the key workers of their expanding industry, they may find the strange situation where high unemployment does not contain salaries in their industry. At the same time the hard-core Keynesian economists will endeavour to stifle these adjustments and will remain confused as they inadvertently preach the fungibility of labour.