Boxes, Foreheads, and Price Signals

Russ Roberts at Cafe Hayek has an illuminating post about how to think about jobs:

Some say that a nation should strive to acquire high-paying jobs if it wants a high standard of living. In this view of the world, jobs are boxes that workers jump in and out of. Each box has a bar code that determines how much the job pays. The goal is to get a good box with a high wage attached to it.An alternative view of the world is that the bar code is on the worker’s forehead. The worker gets scanned not the job.The wage depends not on the job title but on the skills of the worker.

Russ goes on to explain why the jobs-as-boxes view leads to error and confusion.

I’d like to add that one of the reasons unions and other forms of subsidy often hurt workers more than they help is because of certain implications of the box view. Unions generally try to get the wages and benefits attached to union boxes as high as feasibly possible.

The first effect is often to limit the number of boxes available for workers to jump into. But a perhaps deeper problem is that heavily subsidized wage and benefit packages can insulate workers from labor market price signals that are trying to tell workers to invest in other forms of human capital – to acquire a more highly valued forehead bar code.

When subsidized boxes disappear, due to mechanization, outsourcing, or plain old business failure, workers are usually dismayed to find that there is a big mismatch between their forehead and their old box, i.e., that the real market value of their skill set is surprisingly and disappointingly small. It can be a harsh blow to your self-esteem to find that the best job you can get pays only half as well as your old one. And you’ll sometimes hear laid-off low-skill workers say, “Why didn’t anybody tell me that I should be learning to do something else?” The answer is that prices were telling them – the signal was out there – but you can’t hear it from inside an insulated box.

If you’ve got to subsidize something, subsidize people’s ability to respond effectively to price signals (e.g., provide them vouchers for job training). Don’t create subsidies, like wage supports, that cut people off from the information they need so that they can invest in themselves wisely and find a good fit in a dynamic market.