5 ms·

No, sometimes there is no zone of possible agreement (value produced is below market rate). In this case you can both have shortage and unemployment at the same

by ivalm 5y ago

No, sometimes there is no zone of possible agreement (value produced is below market rate). In this case you can both have shortage and unemployment at the same time. Example, you have labor force of 10 people. All jobs have mandatory stay of 2 years. 6 companies have an opening each that pays 1 mil/year. The openings are staggered so 3 jobs are available on odd and 3 on even years (and last 2 years). 50 jobs are posted with a salary of 100k/year. These salaries represent value produced to company and cannot be raised. All applicants have equal chance to get a job they apply to. The minmax solution is to not take a 100k job because of opportunity cost (you won’t get a chance at the 1 mil job next year). So you have both 40% unemployment and massive labor shortage (56 openings but only 10 viable candidates).

tshaddox 5y ago
If the value produced to my company by a software engineer is below the market rate for a software engineer doesn’t that just mean I shouldn’t want to hire a software engineer? Like if I run a performing orchestra I probably don’t want to hire an anesthesiologist at market rates because they will provide very little (if any) value to my business.
- ivalm 5y ago
  No, you can be existentially important to the company and still not produce market rate worth of value. Example: Virtual Widget Co has one employee. The company makes $120k/year in revenue (and so max cap for compensation is ~100k/year because of whatever other costs). If the employee leaves, the company would not be able to continue and will fold. However, the employee is one of the 10 from my previous example, to minmax their own income they should leave the company despite being indispensable to it/the company folds after they leave. No other qualified person would apply for this job either. In fact, it might even be that the average unqualified person’s wage is far below 100k but even that doesn’t help. A better statement would be “Virtual Widget Co shouldn’t exist because it doesn’t have a viable business proposition”. But this can be counterintuitive in the context of 40% unemployment (4 out of 10 in my example). A more real-world analogy would be “lots of businesses are viable only in the presence of slave labor.”
nradov 5y ago
What point are you trying to make? None of those artificial constraints apply in the real world.
- ivalm 5y ago
  Yeah I made a simplification so you can explicitly compute expectation values and see that there is no ZOPA, but in the real world there is a thing called opportunity cost and people do choose to stay unemployed while looking for job because some jobs pay too low. This is essentially what I tried to demonstrate in my simple example.
TheCoelacanth 5y ago
> All jobs have mandatory stay of 2 years You might as well make an argument based on the premise that pigs can fly. Contracts like that are basically unheard of in the US, outside of top executives and a few rare industries like professional sports.
imtringued 5y ago
>The minmax solution is to not take a 100k job because of opportunity cost (you won’t get a chance at the 1 mil job next year). So you have both 40% unemployment and massive labor shortage (56 openings but only 10 viable candidates). >These salaries represent value produced to company and cannot be raised. This means the company needs one employee at minimum. If it loses that employee it will not produce value. Therefore it is in the best interest of the company to hire two people, the first position is compensated as much as possible, the second is compensated one dollar more than the lowest competing position that got filled. Thus, the top offer becomes $899999 and the lowest offer becomes $100001. However, there is a problem. We have 12 positions but only 10 people. The companies will have to outbid each other on the lowest position until all salaries hit market rate, which is the average of the top ten original positions (6 times 1 mill 4 times 100k) that market rate is $640k for everyone. The 100k jobs never get filled and they shouldn't get filled ever, because a lack of customer demand will never be a shortage. (the assumption in your scenario is that training costs exceed $1000k and therefore it never makes sense to increase the labor pool) The mistake you made in your scenario is that you did not mention price controls enforced by the government. In a free market companies will negotiate and adjust their salary. The lack of training is acceptable for a thought experiment though.
- cutemonster 5y ago
  > This means the company needs one employee at minimum Maybe not -- for example, we don't know if there are other permanent employees already, and then, not hiring more people can be acceptable

by ivalm 5y ago

tshaddox 5y ago

If the value produced to my company by a software engineer is below the market rate for a software engineer doesn’t that just mean I shouldn’t want to hire a software engineer? Like if I run a performing orchestra I probably don’t want to hire an anesthesiologist at market rates because they will provide very little (if any) value to my business.

ivalm 5y ago
No, you can be existentially important to the company and still not produce market rate worth of value. Example: Virtual Widget Co has one employee. The company makes $120k/year in revenue (and so max cap for compensation is ~100k/year because of whatever other costs). If the employee leaves, the company would not be able to continue and will fold. However, the employee is one of the 10 from my previous example, to minmax their own income they should leave the company despite being indispensable to it/the company folds after they leave. No other qualified person would apply for this job either. In fact, it might even be that the average unqualified person’s wage is far below 100k but even that doesn’t help. A better statement would be “Virtual Widget Co shouldn’t exist because it doesn’t have a viable business proposition”. But this can be counterintuitive in the context of 40% unemployment (4 out of 10 in my example). A more real-world analogy would be “lots of businesses are viable only in the presence of slave labor.”

nradov 5y ago

What point are you trying to make? None of those artificial constraints apply in the real world.

ivalm 5y ago
Yeah I made a simplification so you can explicitly compute expectation values and see that there is no ZOPA, but in the real world there is a thing called opportunity cost and people do choose to stay unemployed while looking for job because some jobs pay too low. This is essentially what I tried to demonstrate in my simple example.

TheCoelacanth 5y ago

> All jobs have mandatory stay of 2 years You might as well make an argument based on the premise that pigs can fly. Contracts like that are basically unheard of in the US, outside of top executives and a few rare industries like professional sports.

imtringued 5y ago

>The minmax solution is to not take a 100k job because of opportunity cost (you won’t get a chance at the 1 mil job next year). So you have both 40% unemployment and massive labor shortage (56 openings but only 10 viable candidates). >These salaries represent value produced to company and cannot be raised. This means the company needs one employee at minimum. If it loses that employee it will not produce value. Therefore it is in the best interest of the company to hire two people, the first position is compensated as much as possible, the second is compensated one dollar more than the lowest competing position that got filled. Thus, the top offer becomes $899999 and the lowest offer becomes $100001. However, there is a problem. We have 12 positions but only 10 people. The companies will have to outbid each other on the lowest position until all salaries hit market rate, which is the average of the top ten original positions (6 times 1 mill 4 times 100k) that market rate is $640k for everyone. The 100k jobs never get filled and they shouldn't get filled ever, because a lack of customer demand will never be a shortage. (the assumption in your scenario is that training costs exceed $1000k and therefore it never makes sense to increase the labor pool) The mistake you made in your scenario is that you did not mention price controls enforced by the government. In a free market companies will negotiate and adjust their salary. The lack of training is acceptable for a thought experiment though.

cutemonster 5y ago
> This means the company needs one employee at minimum Maybe not -- for example, we don't know if there are other permanent employees already, and then, not hiring more people can be acceptable