The Financialisation of Labour

The Financialisation of Labour

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We are used to thinking of workers as free agents who sell their labour in a market place. They bid a price, companies offer a lower price and the market clearing rate is somewhere between the two. Free market economics, pure and simple. 

But actually that's not quite right. The financial motivations of workers and companies are entirely different. To a worker, the financial benefit from getting a job is an income stream, which can be ended by either side at any time. But to a company, a worker is a capital asset. 

This is not entirely obvious in a free labour market. But in another sort of labour market it is much more obvious. I'm talking about slavery. 

Yes, I know slavery raises all sorts of emotional and political hackles. But bear with me. I am ONLY going to look at this financially. From a financial point of view, there are more similarities than differences between the slave/slaver relationship and the worker/company relationship - and the differences are not necessarily in the free worker's favour. 

So, let's look at our slave labour economy. The purchase of a slave is a capital purchase in exactly the same way as the purchase of plant. The carry cost of that asset is the upfront purchase amount amortised on some reasonable basis, plus the present value of the expected cost of maintaining that asset over its lifetime (food, shelter, medical costs), plus the present value of exit costs (funeral expenses). The exit cost can be avoided by selling the slave before death if there is a secondary market in nearly-dead slaves. The slave can "go wrong" (become ill and therefore unproductive) and need fixing, which may be a greater cost than the value of the slave - an eventuality for which the company might wish to take out insurance. But unlike a free worker, the slave can't voluntarily leave and can't be sacked without incurring a capital loss. Once purchased, the only way of eliminating the carry cost of the asset is to sell the slave, and that may be for considerably less than the purchase price.

Therefore the company will only buy the slave if the present value of the anticipated future income stream from the slave's productive labour exceeds the cost of carry. As with all capital purchases, estimating future income streams is informed guesswork, and much depends on the company's confidence about the future. If the company is confident that the slave can be productively used far into the future, they are likely to buy. But if the economic outlook is bleak, and perhaps the future of slavery is uncertain, they are not likely to buy slaves. They will use free workers instead.

You see, the main difference between buying a slave and employing a free worker is the up-front capital expenditure. A free worker is still a capital asset but it is, if you like, leased rather than owned. The carry cost is recruitment costs (if any), plus the present value of remuneration over the anticipated period of employment including benefits and taxes and the present value of anticipated exit costs (redundancy, pension payments). We would expect that the remuneration package for a free worker would be more than the cost of maintenance for a slave, and exit costs may also be quite a bit more - but in a difficult labour market this isn't necessarily the case, as I shall explain.

The important point, from a company’s perspective, is that up-front capital expenditure is far less. So when companies wish to hoard capital, and are worried about the future, free workers are a much better option than slaves. Free workers can be recruited at little cost and, often, dismissed at little cost - particularly if they were recruited on a casual, temporary or self-employed basis. And their remuneration stream can be limited to payment for the work they actually do, because the responsibility for ensuring that they have food and shelter doesn't rest with the company (since it doesn't own them).

In a difficult economy where there is considerable competition for jobs, free workers can end up being paid LESS than the maintenance cost of a slave. This has actually happened at various times in history - Steinbeck's depiction of the plight of migrants from the American mid-West in the Great Depression immediately springs to mind, but there are numerous other examples of worker remuneration falling well below the cost of living, resulting in starvation. When jobs are scarce, companies are likely to be less benign to free workers than they would be to slaves - after all, buying a slave is an investment, whereas a free worker on a temporary contract is only as useful as his current production and is not a long-term commitment. We would do well to remember this. 

Of course, there might be a very deep and liquid market in slaves, in which case companies could buy and sell slaves as required to meet operational needs. There would still be up-front capital cost, but for short-term use this might be netted out with forward sale contracts, and there would then be little difference between free workers and slaves - in fact slaves would be preferable because they can't resign and the company has complete control over their deployment. Or there might be agencies that provide slaves for particular purposes on a just-in-time basis - perhaps to cover peaks and troughs in production demand, or to cover skills shortages. There might be slaves with specialist skills that earn fees for their owners through being sent out to provide expertise to client companies. And companies could outsource some functions to slave farms, perhaps in a different country. Please tell me how ANY of this differs materially from the free labour market? 

Now, of course, we don't have a slave economy. We have a free labour market. Or - do we? Read all of the above again, substituting "robot" for "slave". And then tell me why it is that the wages of free workers are falling and there is huge growth in temporary, casual, self-employed and zero-hours contracts. 

At present companies are hoarding capital and worried about the future, so it is not in their interests to invest in plant - which is what robots are. Their outlook is essentially reactive and short-term, so they want a reactive, short-term workforce. They don't want to undertake the capital expenditure required to automate. They don't want to invest in workers long-term either because training and development is also a capital expense. And they don't want to wait for full productivity: they want to buy in workers who can "hit the ground running" - hence the impossible requirement for young people entering the workforce to have "experience". However you look at this, there are structural problems in the labour market caused by companies' short-term outlook and lack of confidence about the future. And the UK's highly flexible labour market encourages this - at the expense of economic stability and people's well-being.  

In my view the major problem with the UK economy is a failure of corporate investment. The reasons for this are unclear: there may indeed be a lack of profitable investment opportunities, and there is undoubtedly a lack of business confidence and a shortage of demand for goods and services. But by eroding employment protection and encouraging growth of unstable, insecure and short-term jobs, we are actually making matters worse. I don't see this as an "either-or" between investment in robots and investment in people: the fact is that companies are investing in neither when they could invest in both. Instead they are churning an increasingly insecure and impoverished - though nominally "free" - workforce. And we are the poorer for it.


Related links: 

The Grapes of Wrath - Steinbeck

Bifurcation in the labour market - Coppola Comment

Perverse incentives and productivity - Coppola Comment


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interesting point...however, considering current conditions of excess work supply due to high rates of unemployment (please see Soth Europe), I don't feel that companies care about long term labour investment..



This is one of the most original economics pieces I've ever read, ever.

1) Now I understand why over indebted romans would sell themselves for 5 years or so. It made more sense financially.

2) I've always thought that the main reason for the abolition of slavery is cheap energy, hence humans were no longer needed for energy provision purpose.

3) How about socialist euro countries, like France etc. It's almost impossible to fire an employee.
It's as if the state and unions are pushing for some kind of slavery, because as you say, it makes more sense financially.

This is an outstanding piece, absolutely outstanding.

Good article- and if you look further in to your analogy, even more can be seen. A lot of this is connected to land ownership- if you can charge people just for living on land (rent), then you can collect the margin above their survival threshold, whatever their efficiency. Increased efficiency in one part of the labour force (which we should celebrate) casues misery for the unlanded workers, as they now have to work at either the same efficiency as the new technology, work more, or be paid less for the same work. Clearly a slave doesn't have this problem.
It has been argued in the past that the only reason slavery was required in the Southern States, and not in Europe, was that there was too much land in the new world to force labour to stay on it- whereas in the old world, land ownerhsip meant people had to work regardless.
The very sad thing is- and this relates to your article on automation more- in both the case of the slave capital investment or "free labour" tempory cost- once human labour is no longer required, a company will simply write off the costs. If the company has invested in a new technology that never really takes off, the systems are shut down, the hardware scrapped. What is to stop this happening with a huge portion of humanity? If the labourer no longer has anything to offer (let's imagine a completely automated industry), what can they do to pay their rent/ buy their food? They are now completely reliant on the charity of owners of land to provide their housing, and the food that is connected to it- with no way to break this mould ever. It's all very well to say "charge for their company", but really- most people have little enough to offer in this regard to a tiny elite holding all the cards/wealth. Sure, a really attractive female might command the fleeting interest of a wealthy member of the elite (sexual or not), but a normal middle aged working class man? What could they possibly offer a man (or woman) who has riches beyond our imagination?

This is an apt description of much third world and middle eastern 'human resource management' . Cash flow problem - don't pay workers for three months. Natural disaster - lay off workers to starvation (despite food availability). We ended up with Atkinson's model of the flexible firm with all the good bits taken out.
The issue is deeper. We are on the way to robot heaven - you have to think of robots as clever tractors and such. I guess full employment to produce food, shelter and so on for us all would lapse to around 2 days a week with 3 months off. What we never look at is how employers would get us to work once free of want - something beyond Calvinism or 'slavery to making a living'.

Trying to place this in the context of the early Victorian 'philanthropists' like Lever, and Owen, and the chocolate 'empires'. They treated their employees more like 'slaves' meaning a capital asset, and looked after them very well. There was also the artisan and craft movement championed by William Morris, where mass production was seen as the wrong approach for sustainable progress. Was he right, in this, the era of 'globalisation'?

Where do we go from here before the West becomes a third world backwater?

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