How much should we be fearing “resets”?

It is a common observation that nominal wages are sticky but let’s not forget that real wages are often sticky too (and in fact nominal stickiness tends to matter much more when accompanied by real stickiness, but that is a point for another day.)  That means many labor market changes will be slow to manifest themselves in the real world.  Furthermore you often will see them first for new jobs, for the young, and for new labor market entrants (usually but not always the young).

To cite one example, commentators are debating whether Obamacare will induce employers to “shed” insurance coverage, given that the workers can be picked up by the subsidized exchanges (and the fines, where applicable, are relatively low).  Probably we won’t know the size of this effect until we have had a fairly full set of job “turnovers” in labor markets, as many employers will be reluctant to upset previous explicit or implicit deals.

Circa 2013, I fear many of the pending reset deals in labor markets.  Insiders are often treated quite well, but the next generation of outsiders may never reattain such privileged positions.  The average doesn’t change very rapidly, because most of the employed still are insiders.  Still, we can see that the reset may be a doozy.  After all, labor’s share as a percentage of gdp has been falling in many of the advanced economies around the world.

Even putting cyclicality aside, Greek and Italian youth worry about exactly this problem.  Any aspiring academic in the United States should worry about the reset too, with or without MOOCs.  Especially in the humanities, the old privileged positions simply aren’t being replicated because for most schools those positions no longer make economic sense.  At the same time, few if any tenured professors are taking significant real wage cuts.

Resets show up more quickly in some sectors than others, most of all they come quickly when buyers and sellers have only sporadic and perhaps even anonymous contact with each other.  In other words, the reset comes more slowly for the mistress than for the street prostitute.  And when you see youth losing relative ground in labor markets, that is another signal that you should be worrying about resets.

Fear the reset.  The world will continue to produce much more value, and much more gdp, but who will capture that value is already changing dramatically and will continue to do so.

Addendum: Here is commentary from Ashok, and also from Luis Pedro Coelho.  And from On Demand.


Tyler, I'm not sure if you've seen this paper from Mark Huggett, Greg Kaplan: "The Money Value of Man", but it's quite relevant. Here's the abstract:
"This paper posits a notion of the value of an individual's human capital and the associated return on human capital. These concepts are examined using U.S. data on male earnings and financial asset returns. We find that (1) the value of human capital is far below the value implied by discounting earnings at the risk-free rate, (2) mean human capital returns exceed stock returns early in life and decline with age, (3) the stock component of the value of human capital is smaller than the bond component at all ages and (4) human capital returns and stock returns have a small positive correlation over the working lifetime."

You can find a link here:

I've distilled the essence of this paper in the context of "resets" here:

TLDR is job security inequality is of growing concern relative to income inequality. This can best be measured by the mean-median spread of bond and stock components at each point in life. I suspect even if Germany were as unequal as the United States, at younger ages the spread would be quite a bit smaller than the US. This is just speculation.

But the structure of the paper is a world where human capital earns more than domestic physical capital, and if labor share falls at the current rate (it probably won't, but say it does) and the mean human capital returns were still higher than physical capital, it suggests the *mean* is doing a lot of the work (as opposed to median).

The solution is conditional capital endowments of Vanguard ETFs, or something. Would provide the proper hedge for job insecurity. One point I don't consider is unemployment insurance can be considered with something like this in mind, but that's a whole different post.

"the reset comes more slowly for the mistress than for the street prostitute": by their metaphors thou shalt know them?

I thought it was a different market segment like nightly motel rooms vs extended vacation beach bungalow leases.

So, would you use the latest UAW pact as an example of a reset? New hires are being paid far less than senior workers.

It is most visible in union contracts (including those for public employees) but I think TC worries that it is a wider phenom.

Stop and Shop supermarkets recently agreed to a new contract with their unions in which current part-timers got to keep their health insurance but new hires will not have it so presumably the company will be paying the fine to dump them onto the public exchanges.

Perhaps keeping them as part-time is how they'll avoid the fine too.

A wider phenomenum like 60%+ unemployment among young adults in Greece and over 25 per cent in eight other OECD countries. Japan had a lost decade. It looks like Europe may wind up with a lost generation. I would hate to be a high school graduate today with no decent job options.

I interpret (I can't say I understood it, because I didn't) the dry economic talk as suggesting there will not be enough jobs to go around and those lucky enough to get jobs will get lower wages after the reset. (There will be more human capital than needed; human capital will be cheap.)

Solving the job insecurity problem by issuing "a lump-sum Vanguard Exchange Traded Fund" seems like a less effective solution than solving the problem of how to make human capital valuable again.

Yeah, I see things like 300,000+ enrollment in Couresra's Computer Science 101 course, and think that while some will find work, some "cognitive surplus" really is just surplus. In that case, and given crazy inequality, we might need government to subsidize low marginal product workers from here on out.

I thought large swathes of public sector employment have been doing this already.

I see that "the Walmart problem" is in the news again ... those would be "private employees" also on government assistance.

Government employee = Wal-mart employee?

Sounds about right.

Or restrictive immigration policies could be adopted, that would cut the supply of "marginal" labor and increase its wages.

Interest rates need to rise. Low rates create preference for equipment investment. Higher (just typical really) rates normalize decision between labor and equipment. Bonus: increase in private savings and real investment instead of non-productive government transfer payments. The idea that we should permanently subsidize the lowest earners is a give-up move from the right and the goal of the Left. The silly leftists who think that they will be part of the ruling 10%. Useful idiots indeed. The rulers are 0.001%. All the rest will be pawns in a much poor world.
To not be aspiration all for all is to dwell in snobbery, intellectual laziness and blatant cowardice.
I don't return to read responses.

Hmm. Don't we usually think of nominal wage stickiness as something that inhibits markets from reaching equilibrium and clearing, and don't we usually think that reaching market equilibrium is a good thing? If so, shouldn't the fear be that we don't "reset" soon enough rather than that we do reset?

I can think of several ways in which delayed resets could be hurting us. Re: Greek and Italian youth, beyond the unemployment that can be at least partly attributed to sticky wages, the linked article mentions that many Greek youths are contemplating either moving to other countries or starting up new enterprises. Thus, it appears at least plausible that the absence of past resets may have contributed to the labor immobility and entrepreneurial stagnation that is a significant contributor to the current European malaise. (In fact, I seem to remember a recent post here about how labor immobility could cause "liquidity leakage", causing monetary expansion to lead to high German inflation without reducing unemployment in the periphery.) An emerging class of mobile, entrepreneurial Greek youths hardly seems like something to "fear". Regarding the privileged positions in the humanities, it would seem that spending money on positions that "no longer make economic sense" is the economic drag. Thus, the sooner the reset, the less the drag.

TC correctly identifies as negative symptoms the fact that few tenured professors have taken real wage cuts and that youth are losing relative ground in labor markets, where I interpret "relative" to mean relative to older workers. However, the conclusion that we should worry about or "fear" resets is a curious one. These symptoms are all consequences of labor-market frictions that prevented resets that should have already occurred. Thus, rather than fearing resets, it would seem that we should concern ourselves with how to accelerate resets, with particular emphasis on breaking the protections that currently shield privileged older workers and not indulging any sense of denial among younger workers that somehow resets can be avoided in perpetuity. The true worry is that the fear of resets will prevent us from achieving the dynamic, labor-mobile, entrepreneurial, vibrant economy with fewer humanities professors and more generational equality that we are missing out on right now.

Rigidities are a feature not a bug in the economy. people work hard to get to a place of relative (fleeting) stability ... what's the point if you take that (even as a goal) away from them. I suspect there's something important about risk premiums and demographics at work here (and less about particular new policies). But I would agree that if you see a system (no matter how inefficient or incomprehensible) start unwinding (via resets or any other mechanism) there is a good reason for some fear (of the positive kind too). Also way to spin Greek youth unemployment ... as unlocking the entrepreneurial spirit ... people are quite resourceful, but they also have breaking points (hence rigidities). It's one thing to see the new equilibrium, it's quite another to get the transition path right (in a humane, social welfare sense).

very right. something tells me a Schumpeterian analysis does not lend itself well to latter day Greece.

By the way, benefits from certain labor market rigidities – like the tenure – might outweigh the welfare costs. At least there is a strong argument in favor of tenure system (University of Phoenix, anyone?).

Rigidities are a feature not a bug in the economy. people work hard to get to a place of relative (fleeting) stability … what’s the point if you take that (even as a goal) away from them.

No no no change must be embraced fully.

The last trace of stability is largely gone for a lot of people. .. but there is a lot of pretending still going on. Law firms are making people work hard for a shot at making partner, tech companies are making people work hard for a shot at a big exit etc. etc.

Once people realize that they are the vassals of the managerial class ie. that the engineers who made the iphone are likely to be out on their ears in middle age then there will be another "reset". Managers will have to pay people more up front, and instead of stock options, top engineers will be able to demand revenues shares for their products and IP.. Then the capture of GDP will start to move back in the other direction.

In my experience, most people who apply to Apple do so out of love. Libertarians apply elsewhere. The world will probably always be thus mixed.

That's funny, I know a prominent-ish libertarian who is looking at Apple pretty hard right now. He's only one datapoint of course. Or maybe libertarians can love :)

Of course there's also the Lisa Jackson route.

There are companies out there that do pay engineers a fraction of the revenue stream their products generate. They're generally analog chip design firms and they're pretty upfront about how they structure the returns and the fact that they form golden handcuffs to keep the engineers there.

The "spin" on Greek youth unemployment unlocking entrepreneurial spirit is not my invention. It is from the linked BBC article, section titled "Positive action".

Rigidities are a feature from the perspective of the older, privileged, employed insiders. Not so much for the young, unemployed outsiders.

Disagree. Some of the strongest rigidities I encounter are from younger not older workers, it's as much of a personality type as a insider-outsider role. I like change, it is the only constant. But I can appreciate that it is painful and the transition path matters a lot. Reminds me of Dan Ariely's work on removing bandages: ripping a bandaid off is more painful than slow removal ... same end point, different overall experience. Life is not about equilibrium.

The rigidities are costs that cannot be shed in response to market conditions. This could either be core competency type positions or people, or sinecures that are a burden and drag. Unproductive economies or firms are full of the latter and they cannot be displaced easily. There are no resources left to build core competency or grow, the resources are already allocated to maintaining the sinecures.

With the competitive global market most of the sinecure positions are paid by the state, either in their employ or by pensions, or by implicit or explicit government support. We are far beyond the rooms full of people doing nothing productive, those situations were mucked out a couple decades ago. Now the rigidity is more systemic and almost impossible to dislodge.

It isn't about not paying people, it is about the economy not being burdened to the point where it cannot move. If your economy has to desperately produce cash to pay either pensions or government employ wages, or come up with an interest payment on some old debt, there won't be opportunities for growth.

My work consists of many small jobs and if I have a couple of weeks of work lined up it is very busy. A half year's worth would be unprecedented. Paradoxically in my industry it is very common for folks to get hired, trained work for many years till retirement at the same firm. We sell human capital. Many of the larger firms I deal with are actively working to get rid of any fixed costs possible, meaning that they for example get rid of all their A/P folks and shuffle the costs down to us. It costs them far more money to have us spend hours doing their paperwork, but they would rather pay us than pay a girl in an office somewhere at 1/4 the wage to do it. Very odd.

In the real world the rigidities are in non productive pursuits of paying obligations to the previous generation or paying for government to tie up the economy with regulatory burdens. A local firm has as it's most highly paid employee an industrial hygienist. Pure cost with no productive benefit. The more of this stuff going on translates into high youth unemployment.

I agree that the human costs are high for this type of change. Someone has promised something that cannot be paid for, and the folks who count on that are hurt. Who promised these Greeks that they could retire at a young age and have all these wonderful things that rich nations gain at great cost?

get rid of all their A/P folks and shuffle the costs down to us. It costs them far more money to have us spend hours doing their paperwork, but they would rather pay us than pay a girl in an office somewhere at 1/4 the wage to do it. Very odd.

Not odd at all. You are a vendor, and your contract is presumably much easier to end than an employment relationship. And although the wage may be 1/4th (which I doubt), there are many other costs associated with finding, training, and retaining an employee, including numerous intangibles (morale, fit, space, equipment, software licenses, etc., etc., etc.). As a small business owner with many outside vendors, it is much easier to put pricing pressure on vendors than on employees. And in this environment some vendors are offering us lower prices to stay busy and have some cash flow.

In my experience, the difference between an "employee" and a vendor is similar to comparing a civil servant who belongs to a strong union and an entrepreneur in a free market. And that similarity becomes stronger over time. YMMV.

The only practical implication of this that I see is that policy choices might not be designed well for the "real" state of the labor market but rather for the red-shifted snapshot we get of the old person labor market. But the passage of Obamacare, which seems explicitly designed for a world where employer-linked health insurance is harder to come by, suggests that is at least not always true.

What are your thoughts on how a status reset would work?

I'd think it'd be very slow and then all of a sudden .

Interesting. Unless there's a revolution or something (and the nonlinearities there make prediction hard) I see it as the opposite. It will happen slowly before our eyes, and then before you know it it's done.

On second thought maybe that's exactly what you were saying, but I don't see the "suddenness" in action as much as in realization.

I think we agree. When it comes to status, there is no real "action".

Every mouth has two hands to feed it ... societies just vary in their ability to use idle hands. I'd like to think market democracies could still be employer of last resort. Still, life is better for an unemployed westerner than for a firewood gatherer in North Korea. It could be worse.

If we're playing I'd like to think, I'd like to think we could all tend rabbits and live off the fat of the land.

I think you mean potatoes ...

Well, we ain't got no ketchup, Lenny.

In Silicon Valley, I was making $115/hour at the start of 2001 and $46.25/hour at the end of 2002 - that was a real reset!

Ho, I told you to maximize your upside earning potential by increasing your dating turnover. Don't get all uppity, now that you've failed to follow a player's well-considered advice.

Thanks Pimpbot 5000!

This was similar to a previous question I had. Perhaps the great moderation set up a lot of such overhangs.

Resets account for wages, not wage share. Wage share and its inverse, profits share, are determined by:

1) the intensity of firm competition
2) factors that raise returns to capital

1) dominates 2). That is, productivity growth can raise returns to capital, but only if the intensity of competition falls. At a constant intensity, productivity growth will result in lower prices and higher real wages. The factors that allow 2) to dominate 1) are not positive ones. For instance, returns to capital correlate with the risk of long term investments. The risk of l.t. investments may be a function of policy uncertainty.

Therefore any "reset" explanation of wage share must also explain why the "reset" is not passed on as a lower real price for the final good.

One wonders how much of the "reset" will be manifest as a "restructuring" heavily driven by various sorts of regulatory arbitrage. For example - don't hire anybody at all, use only temps provided by services. Don't grow as a single org, instead have key owners own a whole set of small orgs. Nobody is an employee, no org is above various threshhold sizes, unionization makes no sense, automation is applied with great vigor as are various kinds of out-sourcing.
Nothing is invested in human capital other than what the owners invest in themselves.

Main effect - possibility of no liabilities more than 2 weeks in duration.

Just as the main property of the call-girl or mistress is higher hourly cash return but smaller or none-at-all lingering obligations.

Which is all just more of "if it's too costly/confining/inflexible, it will fail"

Already happening. What characterizes the economy is vast amounts of money belonging to investors with little or no interest in what it is that creates return for them. Nor any expertise. 2008 would have mucked out all these fools but for the generosity of taxpayers. And it seems the hard labors of those who actually do things.

Observations of wage rigidities is an illusion of survivorship bias.

Even taken stickiness for an individual's wage as a given, in the labor market firms will reprice labor through the process of attrition, layoffs and rehiring at lower wages, shifting to lower priced current employees to do the labor of higherpriced employees. And the labor market is more flexible than an individual firm.

The biggest problem I see in economics is the analysis of the mid-game between micro and macro. There may be observations of rigidities at the macro level that seem to have foundational support in microeconomic analysis, eg labor contracts, but the market runs over, through, or around these in the near to intermediate term. Going in the other direction, micro observation of menu costs leads to a fallacy of composition for inferences to the macroeconomy.

Econ understands well what goes into and what comes out of the sausage grinder, but it has no idea how the sausage grinder operates. Worse, it is keen to ignore how the grinder operates. It just assumes that certain things can and must take place in the middle...somehow.

Labor already has repriced and reorganized more quickly than Keynesians would predict and not as neatly as classical economists would hope it to be. This is why returns to other inputs of production are so high.

To cite one example, commentators are debating whether Obamacare will induce employers to “shed” insurance coverage, given that the workers can be picked up by the subsidized exchanges (and the fines, where applicable, are relatively low).

Are we really asking whether incentives matter? Monetary incentives? For large corporations? With shareholders to whom they are legally obligated to maximize profit?

Unless the idea is the IRS, EPA, DOJ, and HHS harass anyone who doesn't play ball into bankruptcy. That might work, especially if we toss the FDA in :)

Could someone define "reset" in this context?

I just like that you said cyclicality . That's a very cool word. I'm not entirely sure it's a real one, but we all got what you meant in context. Kudos.

Humans are on the way out, and that is exactly how the rich oldsters who have 100% of the power like it.

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