Tuesday, October 5, 2010

Compensation and Career Paths

The economics of labor is complicated (yeah, I know... "And water is moist," but bear with me here). When you try to approach labor the way you would wheat (to use Shiller's recent example), you run into all sorts of problems. Wheat doesn't get its hopes up. Wheat doesn't get discouraged and pull itself off of the commodities market. And most importantly for this discussion, wheat doesn't make long term career plans.

With jobs requiring extensive qualifications, training and commitment, people tend to think in terms of careers and career paths. Career choices come with significant up front and opportunity costs (just ask someone who has made a major vocational change). In order to justify these costs, people generally look for careers that offer at least one of the following:

1. Opportunity for advancement;

2. Significant seniority-based raises;

3. Potential for really big payouts.

You might be able come up with some exceptions (priests, perhaps) but it's unusual to see people signing on to four or more years of college with the expectation that they'll be doing the same job for roughly the same pay from the year they graduate to the year they retire.

There's a caveat associated with seniority-based raises. They have to come with strong assurances of job security. Being both expensive and easy to fire leads to some fairly obvious problems.

It has gotten popular to suggest that we can solve any employment problem just by offering big enough performance bonuses, but if you're going to ask people to go into professions that offer stagnant pay, no security and no real chance for advancement, you'd better plan to put lots of zeros on those checks.

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