A Financial View of Labour Markets

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 depreciated 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. 

When companies are hoarding capital and worried about the future, it is not in their interests to invest in plant , which is what robots are. Companies' 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.  

For at least the last decade, and probably for much longer, the major problem with the UK economy has been failure of corporate investment. The reasons for this are unclear: there may be a lack of profitable investment opportunities, and since the financial crisis there has undoubtedly been a lack of business confidence and a shortage of demand for goods and services. But if we erode employment protection and encourage growth of unstable, short-term and poorly-paid jobs, we actually make matters worse.

Despite the fears of modern-day Luddites, investment in robots doesn't seem to have significantly displaced investment in people. The truth is that companies have been investing in neither people nor robots. Instead, they have churned an increasingly insecure and impoverished - though nominally "free" - workforce. And we are the poorer for it.

This piece was originally published on Pieria in May 2013 under the title "The Financialisation of Labour". We have not moved on signifcantly since. There is still a dearth of corporate investment in either robots or people. The unstable, short-term and poorly-paid service jobs created by the thousand after the financial crisis are now disappearing by the thousand as the pandemic destroys the "gig economy". But as unemployment heads for the moon, governments are reaching once again for the ideology of highly flexible labour markets. Secure, well-paid jobs are not what they want to create, and they don't seem too keen on investing in training and skills development, either. When will policymakers realise that tight labour markets drive corporate investment?

Related reading:

The Grapes of Wrath - Steinbeck

Risk pricing in labour markets - Coppola Comment

Bifurcation in the labour market - Coppola Comment

Perverse incentives and productivity - Coppola Comment


  1. Well worth republishing, thank you. It would be interesting to reason about how the 3/5th vote is still in vigor in some form.

  2. Interesting reading indeed, thank you for republishing! I wonder how the analogy between workers and robots would work for sports franchises, listed or not, that somehow need to capitalise the value of their players.

  3. Lovely jeu d'esprit! Oh, to be a slave!

  4. Strictly speaking, neither the employee nor any training (s)he receives is CapEx. What's more, I have never seen anybody making even a back-of-the-napkin NPV calculation for an employee. For low skilled labour it matters little, for the C-suite it is difficult to compare against (low substitutability). Or one could say the same in terms of relative bargaining power. Plus, there's just no reliable "useful economic life" for an employee (and rightly so). The rest I'd agree with.

    1. Whether or not companies explicitly calculate the NPV of their employees, they do in fact treat them as intangible assets. Indeed your comment about the difference between the C-suite and low-skilled workers makes this clear. I discussed the valuation of intangible labour assets at some length in "Risk pricing in labour markets", link at the end of the post.

      Training is investment in human capital and as such is capital expenditure. I did point out that in a free labour market, employment is leasing, not ownership.

      The fact that people are encouraged to retire, and that when times are hard older people are often targeted for redundancy, shows that there is in fact a "useful economic life" for an employee. You may not want to admit this, but people close to retirement are reaching the end of their economic life and are treated as such by employers. That is why it is so difficult for people in their 60s to find quality work.

    2. Sorry, I have to disagree. I mean, if the employees wouldn't be free to leave, I'd say you're right. But they generally are, so you're generally not. This is why wages, salaries, other employment benefits (use of company car, laptop, mobile phone, training, etc.) are all operating expenditure. They are sunk costs, don't qualify as assets. Now if, as an employer, you'd want to slap a value on your 'hope' that your employees you have so much "invested into" will keep working for you, then, by all means, feel free to do so: you can record that as a contingent asset. But you can't put it on your balance sheet. :)

      Btw, I have worked at several large companies, audited quite a number. Never seen anybody from HR or management calculate like you've suggested. The "normal" employee's ask for benefits will mostly be capped by budget lines, for the C-suite by nothing; high level people are mostly chosen based on connections (networking, X knows Y, Y knows Z, etc.).

    3. Please read "Risk pricing in labour markets" as I suggested, link at the end of the piece. I deal with all the points you raise in that piece.

      The fact that large companies don't account for employees as leased assets is frankly neither here nor there. Indeed if they did, I wouldn't have bothered to write this piece. The whole point is to consider employment differently from how it is normally perceived.

  5. «And the UK's highly flexible labour market encourages this, at the expense of economic stability and people's well-being. [...] if we erode employment protection and encourage growth of unstable, short-term and poorly-paid jobs, we actually make matters worse. [...] churned an increasingly insecure and impoverished - though nominally "free" - workforce. And we are the poorer for it.»

    But the "well-being" of "people" like the upper-middle and upper classes has improved tremendously over the past 40 years, all you describe did not "make matters worse" for them and they are not "poorer for it".

    Instead of using terms like "workers", "slaves" or "robots", we could use the older generic term "livestock". Then we can say that the current political climate and thus economic policy is based on the principle that farms are run for the benefit of the farmers, not for the benefit of the livestock. When in a dairy farm the milk yield increases by 10%, the farmer's living standards improve, the livestock don't get better fed in comfier barns.

    Or perhaps we could look at the tory instruction manual, written in the 18th century by Bernard de Mandeville:

    “The plenty and cheapness of provisions depends in a great measure on the price and value that is set upon this labour, and consequently the welfare of all societies, even before they are tainted with foreign luxury, requires that it should be perform’d by such of their members as in the first place are sturdy and robust and never used to ease or idleness, and in the second, soon contented as to the necessaries of life; [...] Those that get their living by their daily labour [...] have nothing to stir them up to be serviceable but their wants which it is prudence to relieve, but folly to cure. The only thing then that can render the labouring man industrious, is a moderate quantity of money, for as too little will, according as his temper is, either dispirit or make him desperate, so too much will make him insolent and lazy. [...] From what has been said, it is manifest, that, in a free nation, where slaves are not allowed of, the surest wealth consists in a multitude of laborious poor; for besides, that they are the never-failing nursery of fleets and armies, without them there could be no enjoyment, and no product of any country could be valuable.”

  6. ««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»

    In a competition about the future of work, someone submitted this prophetic story:




  7. What an interesting analysis and financial view of labour markets. I have to share your article with colleagues. Thanks!


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