Wednesday, February 8, 2012

Liquidity of Labor

As part of a major restructure at my previous employer in Australia, I found myself with an American boss who was brought in from outside the company (no it wasn't Trump). In his initial session with the team, he ran us through a PowerPoint presentation to introduce himself and give us some guidance on how he wanted to operate. About 15 minutes in to the meeting, he pulled up a slide titled, "things that will get you fired". I vividly remember the uncomfortable looks on the faces of my colleagues in reaction to this slide. After the session, everyone was saying how shocked they were with the bluntness of this message. Having lived and worked in the US, I can now completely relate to and even in some way appreciate where my boss was coming from. 

The idea of a job for life is widely recognized as an outdated concept, so that certainly wasn't the source of our discomfort. Being employed at a big Australian corporation, I was certainly used to seeing people leave of their own volition or getting made redundant. However in my seven years there, I do not remember any examples of people getting fired. A firing implies that due to some gross negligence or non performance, you were told to seek opportunities for excellence elsewhere, usually in an abrupt fashion. Irrespective of your status as union v non union, there are government imposed rules and regulations in Australia that protect employees, along with internal company policies on the process for exiting an employee for performance reasons or making their position redundant. For a redundancy the payouts were usually quite generous. In fact the corporate intranet even had a spreadsheet you could download to calculate your estimated redundancy payout. So in reality it might have been quite hard for our new boss to "fire" us,  but we were still taken aback by his comments given we felt relatively safe in our jobs. 

When I compare the Australian labor environment to what I have experienced elsewhere in the world, Australia is by no means the most socialist in its desire to protect employees. Another former employer had an office in France, where there are several statutory bodies and legal avenues that allow termination of employment to be challenged by an employee. Due to this, the employer typically negotiates extremely generous severance packages with the employees in exchange for them waiving their rights to pursue the legal avenues. This is also a country that saw no problem with legislating for a 35 hour work week. 

With France on the extreme right of the spectrum for protection of employees, Australia somewhere in the middle of the road, the US would be relatively far to the opposite end of the spectrum from France. In the US, my feeling is that the labor laws are more advantageous to the employer, but can end up benefiting employees which I will discuss below. There is a concept of at-will employment widely utilized in the US. My current employment contract states the following:
"You should be aware that your employment with the Company is for no specified period and constitutes at-will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without notice."
This if fairly typical of the language used in most US employment contracts. This does not override the company's obligations as far as anti-discrimination and other legal requirements.

So how do I feel about this as an employee of a US company? I frankly think it's fantastic. This is where the concept of labor liquidity is born. I am borrowing the term liquidity from finance, where a liquid asset is one that can be converted to cash easily (e.g. shares) and an illiquid asset is one that can not be converted to cash easily (e.g. property). In an environment such as the US, labor is incredibly liquid given the lack of obligation in either direction between employee and employer. In the UK where three month notice periods in both directions are typical, the labor market is less liquid. The US model takes care of employee motivation, as continued high performance of the employee will result in continued employment (the carrot), but the reverse will result in unemployment (the stick). Now because of the lack of obligation on the employers behalf, it means that creating a new position is a relatively low involvement decision. If a new hire is no longer required or does not perform, then the employer can exit that person from the business easily. The flip side of this equation, is that with new positions being created more readily, the demand for high performing employees will provide a decent amount of leverage to the employee to be able to negotiate a package they feel they deserve. Essentially when working well, this model provides an alignment of incentives between employer and employee. I genuinely feel that labor liquidity is one of the primary competitive advantages enjoyed by Silicon Valley. Having moved here right as the GFC took hold, I have seen the negative impact of this model on individuals, but it also meant that companies were able to scale back and survive rather than go out of business. With the cyclical nature of business, we are in the midst of what feels like a boom in high tech which leads to much more favorable outcomes for employees. 

So I will provide a contrary view by saying although I think at will employment is great for educated, skilled individuals working in high demand professions, it is unlikely that this model will ever produce the same outcomes for the middle class. It is naive to think that every individual in a society has the ability, the capacity or the opportunity to skill up as a computer programer as a way to break out of unskilled blue collar jobs. However much of the political rhetoric in many countries is that we need to encourage exactly this to happen, which is simply not practical in all cases.

As an ambitious guy with aspirations to lead companies, I am sure the day will come that I appreciate the flexibility of at-will employment arrangements when I am the one having to make the big decisions. Do I have a problem with the fact that I could show up to work tomorrow and my boss could say, "It's not working out, today is your last day"? Absolutely not. It means that I am motivated to be a high performer, to continue to skill up and expand my knowledge and to never get complacent or comfortable.