Market Share and Interest Rate Driven Job Substitution

Bruce Birkett
October 20, 2015
In the following, let me propose something that may be but one of many factors, but one that is counterintuitive to the generally accepted wisdom and is working against improving the market share of middle-class jobs in the US.

Income Gaps

Does a day go by that we don’t hear politicians and economists talking about the ‘terrible’ income gap between the rich and average workers? And, at the same time, aren’t we also hearing that the Federal Reserve (Ms. Yellen) should continue to keep interest rates at rock bottom to help create more jobs? Since October’s blogs at Hourly Nerd are meant to focus on market share, I thought I’d present an alternative economic perspective on what is harming the middle-class job market. Other problem drivers – such as bad US tax policy, too much interest in social agendas, regulations, education, etc. are not going to be here in the following. Instead, I’m going to focus on the latest September US jobs report and the Yellen Fed September interest rate decision. HourlyNerd

The September 2015 Jobs Report

In listening to commentators on Bloomberg talk about it, the surprising thing about this latest job report was that there is a good strength at the bottom (lowest level, lowest paid jobs) and at the top. Where the growth is missing is in those middle-class jobs. In the following, I’ll briefly touch on a Fed-centric thing that could be depriving the US labor market of market share growth in middle-class jobs. To begin and to summarize, one might point to the following:
  • The Law of Unintended Consequences and Janet Yellen
I haven’t read about it being looked at like this but, if we think back to our business school classes, we learned about the basic model of production and its components: production = labor + capital + raw materials Now, we all know that interest rates have been rock bottom and, in September, Janet Yellen went along with all of those who think, advised and recommended that, since the US labor market (think here “labor force participation rates”) hasn’t returned to previous levels (pre-2008), then we need to continue to be goosing the economy with low rates.

How the Equation Works and Labor Substitution

The idea behind this equation is that all of the items on the right of the equation are more-or-less variable and that “production” (think volume, price, etc.) is relatively fixed. I guess I should provide a brief codicil that obviously if all of the variables on the right can be reduced, either individually or collectively, the “production” price could be reduced, increasing demand, etc., etc. The key takeaway now for me from this equation is the idea of “substitution” and what I want to ponder is, if the market share (proportion of good jobs and salaries) is being reduced in the above equation, what might be driving such a substitution and loss of market share – from an interest rate perspective?

A Non-Discussed, Antipodal Interest Rate Viewpoint

Traditional logic would suggest that low-interest rates (i.e. the cost of “capital” in the above) would mean more money could go to “labor” (especially with commodity prices falling). But, what if, the low cost of capital actually worked against the money going to labor?

Cheap Technology + Low Cost of Capital = More Labor Replacement

I am suggesting that with all of the interesting laws of unintended consequences, the Information Age and all of the new technologies, along with the low cost of capital, are making it very easy to replace middle-income jobs. As the above-referenced Labor Report information tells us, it is these middle-income jobs that are being lost (or not replaced) in the current US economy. Instead, there is strong growth in the lowest wage and higher wage jobs. Factoring in the above equation, it is easy to see the following: Market Share and Interest Rate Driven Job Substitution What this chart is trying to show (my hypothetical numbers) is that there is a middle-class labor replacement sweet spot, where I hypothesize that the low cost of capital and the ability to make use of technology is destroying traditional middle-class jobs.

Top and Bottom Salaries

As shown, at the bottom, the cost of labor is so low that, in general, no replacement is necessary => there is no real return on replacement and it is easier to just keep paying a low wage. (Here it is also suggested that if technology can simplify and ‘dumb-down’ a previously middle-class job and make it a low-wage job, that will and may also be happening.) Similarly, while it is increasingly easy to help the higher paid employees become more productive, their skills are in very high demand and the jobs here are growing => job growth and no replacement.

An Interesting Historical Parallel

When we think of both the blue collar and white collar middle-class jobs of the last roughly hundred years, which is most people’s historical context, in terms of blue collar jobs, these middle-class jobs were created by industrialization and unions. Similarly, for many of the white collar middle management jobs, these were created after the mid-19th century by the need to manage the newly being built industrial corporations, railroads, etc.

A Higher Interest Rate Hypothesis

If the above, very simplified chart is correct, many economists might be wrong in pushing for interest rates to stay low in terms of job creation of middle-class jobs. It might well be that the law-of-unintended-consequences are massively at play here and the market share of such middle-class jobs is being directly and negatively impacted by the very low capital costs of replacing such jobs. There are lots of other potential labor market share drivers that could be explored; but, these will have to wait for future blogs. Graphic-for-bottom-of-Blog

About the Author

Bruce Birkett

Bruce Birkett divides his time between the US and Europe, where he has a number of both large and small business clients for whom he provides a range of consulting services with a small expert team. In the past, he has worked with major institutional investors, particularly in real estate, and he has also helped individual investors looking at private equity. He has been involved in a number of African business ventures and currently also contributes to an English trend following group out of Beijing, China.

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