Sunday, May 4, 2014

Labour Shares™: Beating capital at its own game

We all carry a variety of media of exchange in our portfolios, some more liquid than others. Deposits are pretty high on the liquidity scale, stocks and bonds a little less so, and our household's furniture is even less movable. The most sizable medium of exchange in our portfolios also happens to be our least liquid one: labor. Our capacity to use our brains and bodies to work is the primary currency that each of us own, although it isn't a particularly mobile one. Might things be different? Could labor be converted into a more effective medium of exchange that is capable of competing with highly fluid financial assets for preferred liquidity status?

Much of our lives are spent trying to make marginal improvements to the liquidity of our labour. We may choose to learn more skills so that we can participate in multiple markets, the more markets being open to us on any given day the more saleable our labour. Alternatively we may choose to learn one thing very well. While this leaves us with only one market in which to sell our labor, the quality of our work should differentiate itself enough such that the liquidity we enjoy within that one market outweighs the liquidity we choose to forgo by not participating in other labour markets.

Even with these liquidity enhancing strategies, labor remains a relatively hard sell compared to other media of exchange. This is problematic. Insofar as liquid media are the best hedges against an uncertain future—they can be rapidly mobilized to help plug leaks and patch holes—this means that labour, our largest medium of exchange, does a pretty bad job of protecting us from unpredictable events. It takes too much time and effort to sell the damn stuff. Amongst media of exchange, labour is the slow moving Titanic.

Which is why we fashion contractual crutches to convert illiquid labour into a more vendible product. Rather than go out into the marketplace each morning to find a new person who'll buy our labour, we usually make long term deals with buyers that require them to repeatedly purchase our services over a period of time. Having secured a repeated buyer of our services, we've converted a bad hedge against uncertainty into a better one, at least as long as the contract is in effect.

But there are ways to make labor even more liquid. To do so, we need to overcome the physical characteristics of labour that prevent it from being as good of a medium of exchange as, say, gold. Gold is divisible, portable, uniform, and durable. An ounce can be divided into smaller bits without any loss of value, it can be used by successive individuals without depreciating in quality, and it passes easily across time and space. Labor, on the other hand, can't be bottled up and stored, nor can it be passed on from buyer to buyer. Once expended on some task, labour is dissipated and ceases to be a conveyable medium. Labour is like an ice cream cone, it doesn't last very long.

A time-honoured way to encourage the liquidity of something is to securitize it. Take an illiquid mortgage, combine it along with others into a pool and splice that pool up into easily tradeable mortgage-backed securities. Or convert a sole proprietorship into a corporation, create shares that represent ownership, and list those shares on a marketplace, thereby converting illiquid ownership into liquid ownership. Exporting these ideas to the labour front, if people are capable of toiling away for fifty years, then why not create a series of claims on that labour and allow those claims to be sold off? In this science fiction world, these claims might be called 'labour shares'. While physical labour itself cannot be resold, the non-physical representation of that labour—labor shares—can be passed around indefinitely along long monetary chains.

This solves the resaleability problem that has historically impeded the liquidity of labour. After an employer has bought some of our labour shares and put us to work, should they have no further need for us they can trade away our shares to another employer rather than just firing us. Middle men might buy our shares and sell them on to other middle men, with the odd speculator jumping into the fray when they think they can buy low sell high. Financial engineers might combine our shares together with those of other similar workers, creating large pools of labour that can be bought all in one fell swoop by large employers. Our labour, once the Titanic of exchange media, has become a nimble instrument.

In this science fiction world, labour "does" more for its purchaser than in times past. As before it provides anyone who has bought it with a real pecuniary return (a labour share can be converted into work), but now it also provides an extra non-pecuniary return. Specifically, labor shares act as a stock of liquid media of exchange on par with an inventory of cash. A buyer of our labour, say a firm, now finds itself owning a fairly decent uncertainty hedge—should it be blindsided by some unforeseen event, the firm's owners can rest well knowing that the firm's managers can sell off either its cash or its accumulated labour shares, or some combination of the two, in order to help acquire the resources necessary to resolve the crisis.

Since labour now provides potential owners with a greater range of services than before it will command a premium over its previous price, or a liquidity premium. Anyone who provides labour will receive that premium, thereby earning more than they did before.

There are some ugly aspects to this science fiction world. It is certainly dehumanizing, treating humans like any other vendible commodity or asset. A market for labour shares might breed a highly itinerant workforce the members of which, much like Federal Reserve notes, would be constantly recycled from one side of the globe to the other. It also raises moral questions of personal agency. If we no longer want to toil for the employer who owns our labour shares, must we repurchase those shares—and our freedom—back from them?

The positive aspect of a world with liquidity shares is that in rendering itself more liquid, labor earns a greater share of the pie. Why should capital, after all, be rewarded the entire range of liquidity premia that society has to offer? Over the last few decades, financial engineers have made houses, equities, bonds, and all sorts of other assets ever more liquid. As a result the prices of these assets have steadily appreciated, a higher price being the market's reward for any asset that throws off growing quantities of liquidity services. That's great for the 0.01% who's wealth is primarily comprised of these assets; they enjoy ever growing capital gains (see chart below) and a larger slice of society's wealth. However, the majority of the world whose wealth is largely comprised of relatively illiquid labour potential has been left eating dirt.

The wealthiest 0.01% of society now owns 11% of society's wealth, up from just 2% in the 1970s.
Saez and Zucman, March 2014. [pdf]

Speed up the exchangeability of labor, on the other hand, and the reverse happens—labour grabs a larger liquidity premium for itself, thus appreciating in price and henceforth earning a larger share of society's total wealth.

Another advantage to a labour share scheme is that workers reduce their exposure to the discomforts of uncertainty. A worker's labour, represented by the full lifetime stock of liquidity shares in their portfolio, is more marketable than before, which means that they can more easily sell their labour to deal with potential disasters. This renders the future a little less frightening, the reduced contingency planning this entails allowing workers more time to enjoy the present.

Alternatively, rather than speeding up the liquidity of labour, maybe we should be slowing down the liquidity of all other things. That way labour, in the name of keeping up with the Joneses, never has to go down the somewhat ghoulish path of ever-accelerating liquidity. Various policies including a Tobin tax, the slowing down of equity markets in order to weed out HFTs, Glass Steagall style banking restrictions, and trade protectionism are all ways to help clog up the liquidity passageways. Enact these policies and mobile assets like stock and bonds lose their liquidity premia. The 0.01% who previously benefited from capital gains on rising housing, stock, and bond prices now suffer capital losses, and the labouring 90% will enjoy relative wealth gains.

The problem with these policies is that in constricting liquidity, we'd end up losing a major bulwark against felt uncertainty. Fretting and brow furrowing would increase, our lives worse off than before. The retort here is that perhaps liquidity should never have become our most important uncertainty hedge. In times past, self sufficiency, communities, families, and tribes were the institutions that we relied on to cope with a cloudy future. What made one's labour a great hedge against uncertain events, say a flood, was not that it could be rapidly sold off, but rather that together with other members of the community, our toil, sweat, and tears could be mobilized to plug dikes or rebuild houses. Implement policies like a Tobin tax and we may move back towards this world.

That may be true, by we've gone so many centuries down the liquidity path that its probably too late to reverse course. Labour shares, or something like it, might not just be science fiction; they could be the next step in the great liquidity race, especially if labour wants a larger share of resources. Perhaps the best way to cope with the ugliness created by an institution like labour shares, still very much in the imaginative stages, would be to innovate more humane ways to securitize labour. No-trade clauses or limited-movement clauses, for instance, might allow individuals to have some say in determining the destination to which they are dispatched. Unions may have a role to play in designing standards for labour shares that ensure that we don't bargain too much of our humanity away.

There is probably some upper limit to how liquid you can make something. Until that plateau is reached, financial engineers will keep making capital more liquid, and owners of capital will continuously enjoy the resulting price gains. Unless labour decides to liquidate itself, it could be facing many years of deteriorating wealth relative to the top 0.01%.


  1. Good post JP 3 things: How do you standardize labor to securitize it? i.e. 24k gold in china and texas are the same but individual people's personality and creativity aren't. Do you just stat it out like baseball?

    And why do we need more labor? I can autodraft my internet bill and I love it-- do I really need another customer service agent to increase my cost? Don't get me wrong that I understand there's a huge (local) societal cost in outsourcing my labor --- read one more unemployed soul. But how do you delineate the environmental cost of commuting & pollution & resource constraint vs the social benefit of another person employed although they're probably decreasing productivity?

    And lastly what about the location problem? How do you bring the oil fields to the unemployed when no one wants to move to North Dakota?

    1. How do you standardize labor to securitize it?

      Good question, I wondered the same thing. Maybe there could be some basic minimum standards that laborers have to meet (e.g. competency test results and/or experience) which could be specified like the standards for pork bellies and orange juice. Don't temp agencies run into a similar problem?

      Re: re-location, standardization issues--it might be interesting to look at how mercenary groups and companies addressed these issues. Here's a bibliography on mercenary history I found:

    2. When it comes to standardizing labour the devil is in the details.

      Start out with shares that represent one day of your labour. You can either sell them out in chunks to the highest bidder, or rent them. The buyer/renter can in turn sell them or rent them out, basically going short your shares.

      Labourers might join together as mercenary teams, or unions (thanks for that idea, John S), combining their shares under the umbrella of one entity that sells the team's combined labour-backed securities to the highest bidder. Those teams might be comprised of individuals with complementary skills that are very good at delivering a certain product, say software development.

  2. Sticking with monetary sci-fi: might it be possible for owners of labor pools to fractionally-back labor shares which are directly (rather than indirectly, as Earl Thompson & David Glasner proposed) redeemable into a "predetermined, fixed amount of labor in the free market"?

    Thompson's "Free banking under a labor standard" proposal:

    The average wage in the US is about $25/hr. $25 x 40 hours = $1,000 / workweek. So one labor share could be redeemable into 40 hours of labor at the avg rate ($1,000, held constant for purchasing power). I think this gets around some of the standardization issues b/c owners of labor shares could choose what type of labor to redeem the one share for (59 hours of retail labor [$1,000 / $17], 29 hours for an IT worker [$1,000 / $34 ], etc.)

    1. Interesting. If I recall properly, think the MMTers have something like this with their jobs guaranty program.

    2. After a bit more thought, I see there are some pretty obvious problems with fractionally-backing labor shares. Unlike gold, laborers can't just be produced and then cryofrozen in a vault waiting for redemption. [ Is there a sci-fi B-movie script here? ] Maybe the idea might work in southern China, where factories often have unanticipated spikes in labor demand and there are large pools of unemployed migrant workers.

  3. Some workers bring tools to improve their liquidity. Carpenters and electricians come to mind.

    Some workers improve liquidity by establishing relationships with tools of great size. Auto plants and electric generating plants come to mind as examples of complicated and difficult-to-construct tools that improve worker liquidity.

    If a laboring man can establish a reliable link to tools of some sort, the liquidity of his labor is usually improved dramatically. It usually helps if the laboring man has ownership of those tools, else he may be always at the mercy of other decision makers.

  4. W.r.t. making one's labor more salable, it seems quite silly that we rely mainly on multi-year university degrees to learn new skills and participate in new job markets. Vocational training should be modeled on coding bootcamps, which can (purportedly) turn out project-ready coders in 8 to 12 weeks. If it works for programming, surely some similar combination of intensive training + internships can be used to rapidly bring workers up to entry level standards in a wide range of industries.

    Your post made me think about human capital contracts, but I'm not sure how it ties in. Here's a link on Upstart, which combines HCCs, crowdfunding, and dev bootcamps:

    1. Human capital contracts, now that's a neat idea! Sort of similar to labour shares.

  5. More thoughts.

    The idea of labor shares which can be directly converted into work seems like it would lead to some problems (e.g. a highly itinerant workforce, time lag for workers to become productive at new firms, corporate espionage concerns). However, using a tweaked form of human capital contracts, I think workers can get the benefits of increased liquidity for their labor w/o the complications of direct redemption.

    Let me first make a detour into the world of poker tournament staking, which is somewhat analogous to what I'm proposing (cash game staking also exists, but it's a bit more complicated).

    In a nutshell, a player who plays large-field poker tournaments for a living will experience extreme short-term earnings volatility. Even the most skilled player in the world stands a significant risk (10-20%) of being a loser over a sample size of 1,000 tournaments. It's not uncommon for online (let alone live) tournament specialists to go months, or even years, w/o a big cash.

    (More here:

    Methods for coping with this short-term variance have evolved. A common technique is "selling one's action" (aka "selling pieces"). For example, if a player wants to enter a tournament with a $1,000 entry fee (buy-in), he can ask for backers who will pay a percentage of his buy-in in exchange for the right to claim an equal percentage of his winnings (i.e. a 10% piece would cost $100; if the player wins the tourney for $100,000, that piece will be worth $10,000). If the player wins nothing, he is not required to repay the backer for his piece of the buy-in.

    The player benefits by reducing his immediate cost (the buy-in) in exchange for capping his potential winnings. By doing so, he gives himself a slight cushion against negative short-term variance.

    1. Let's bring this back to HCCs. Most workers don't face anything close to the short-term uncertainly poker tourney pros deal with. However, no one is immune to future financial risks. An unanticipated technology could make one's job obsolete. A recession could lead to being laid off. A family member could become ill, leading to large medical expenses.

      One way to deal with this uncertainty would be to sell equity "pieces" of one's future income (say for the next 10 years) just like poker tourney pros. The proceeds could then be invested in the general economy via stocks or in a diversified portfolio of pieces of workers in unrelated industries. This would give workers some insulation against technological obsolescence and macroeconomic fluctuations. Additionally, a worker could sell off shares to meet emergency expenses.

      These labor equity shares could also be sold in secondary markets. Issuers could post statements of earnings, financial assets and liabilities, educational qualifications, experience, repayment history, and other relevant information (privacy concerns could be addressed by online pseudonyms after such info was confirmed by the online exchange).

      Returning to poker, websites for selling tourney action provide detailed histories of players' past performance. (Here's a representative site: I'm not sure if a secondary market for tourney pieces exists, but I don't see why it couldn't.

      Most writing on HCCs has focused on using them to fund investments in education. But I think the potential applications are much wider.

  6. Already happening in sports.

    1. These are more of a human capital contract. JP has, I believe, something different in mind - perhaps more along the line of a much grander local exchange trading system

  7. He's talking about a Rube Goldberg machine that is the equivalent to; lines of credit combined with skills training; a debt slave. Or you could go with this hcc nonsense and be a real slave selling off your indentured servitude.

    1. How is entering into a human capital contract any worse than taking on student loan debt with fixed payments? The repayment flexibility of HCCs seems like a great benefit.

      Here's James Surowiecki:

      "Human-capital contracts provide more flexibility. If you’re having a good year, you pay more; if you’re struggling, or going to school, you pay less. In years where you earn less than a certain agreed-upon amount, you pay nothing, and the year is added to the end of the contract. This isn’t necessarily cheaper than traditional ways of raising money, but you’re less likely to get stuck with a payment you can’t afford. (At Upstart, the maximum you’ll pay an investor is seven per cent of your income, and the average is three or four per cent.)"

    2. I've never understood the aversion to HCCs, but it's ever present. I guess there is a sort of slippery slope - at what maturities and what percentages of their income should we allow people to contract? for an infinite maturity (like normal equity) and at 100% of equity, it can get a little mind-bending. If we treat it like true equity, with voting rights, than the person has literally sold themselves into slavery, except instead of to a plantation owner it is to some board of directors.

      But mind experiments aside, I don't understand the aversion to the kind of contracts that are popping up, short-dated small-percentage-of-income contracts.

      Or for that matter, I don't truly understand the aversion to limited time indentured servitude. From my understanding of history it seemed like a fantastic tool for social mobility. In fact, you wouldn't be too far off the mark to think of some analyst and associate positions at consulting and investment banking firms as indentured servitude (you're a bitch - not just for the two-three years that are marketed but often for much longer - but the payoff is quite fantastic).

    3. I suppose equating HCC with actual slavery is a tad hyperbolic. The point i was trying to make, which got lost in my rant was, that it seems to me, though I'm not really familiar with HCC, it would require unnessesary complexity when compared to updating/reforming the institutions that we currently turn to to build human capital. Thanks for the link. I'm looking forward to learning more about HCC before I write more things that demonstrate, beyond any doubt, how little I know about the subject at hand.

    4. Wow that was a horrible paragraph I just wrote. Unnecessarily complex without any additional benefit; had I kept it simple. Stupid.