The searing complexities of America’s labor market
America faces a complex labor crisis, one that is challenging to faithfully characterize let alone solve. Let me offer three striking snapshots.
Snapshot one: America’s military leadership shrilly warned the past two weeks about the challenge of recruiting soldiers. Like most labor problems, it’s not a new phenomenon, but one that is indeed intensifying. The story kicked off back in March with a prescient overview from David Barno and Nora Bensahel in War on the Rocks, who summarized the situation simply as “The all-volunteer force may finally have reached its breaking point.”
Why? "First, the number of young people who are eligible to serve in the military dropped precipitously last year — from an already low figure of 29 percent to a shocking 23 percent — largely due to the effects of the COVID-19 pandemic.” A combination of mental health challenges, rising obesity and physical health decline, lower test scores, on-going drug usage, and criminal records prevents more than three quarters of the country’s youth from even being qualified to serve their country.
That’s leading to anticipated recruiting shortfalls across all the branches (save the Marine Corps), leading to deep-dive articles in the Wall Street Journal and a strident opinion piece in Bloomberg from retired admiral James Stavridis titled, "US Military’s Recruiting Woes Are a National-Security Crisis.” He identifies two challenges: the white-hot domestic job market, which has offered high wage growth to exactly the kinds of people the military wants to sign, plus the fact that the U.S. isn’t actively engaged in combat since the pullout from Afghanistan in 2021.
The military is facing the classic example of labor “cost disease” as theorized by William J. Baumol in his original 1967 paper and explicated the rest of his career. Military recruiters are competing directly with the restaurant in my neighborhood with a bold-lettered sign offering $25 an hour for starting workers. Meanwhile earlier this year, Congressman Jimmy Panetta (son of former Defense secretary Leon Panetta) proposed a bill that would expand food stamp eligibility to more active-duty military personnel, after surveys showed that 24% of members lacked adequate and regular access to food.
This is the complexity of America’s labor market today. Obviously, it’s excellent that young workers are finding better job opportunities and pay (particularly as many countries including China experience huge youth unemployment), but it comes at the indirect expense of America’s long-term geopolitical goals. The Pentagon’s budget for personnel was $181 billion in 2022, and it likely needs to inflate that figure by at least 30-50% to stay competitive with the private sector, or additional outlays of roughly $54-90 billion.
That’s a tough sell in the current fiscal environment, even as President Joe Biden authorized the calling up of 3,000 reservists this week to offer more operational flexibility to the military’s European theater.
Snapshot two: Every day on my way to Lux NYC, I pass by the striking workers of the Writers Guild of America, who after weeks on the picket line, have now been joined by the actors represented by SAG-AFTRA Thursday after negotiations with the major movie studios broke down. Hollywood labor unions are unique in the organizing world, representing everyone from unknown background actors making dollars (and often forced to apply for the same welfare benefits as their military counterparts) to some of the most well-paid professionals in the world.
Media is the quintessential superstar economy described in Sherwin Rosen’s seminal 1981 paper, where small differences in quality between market participants can lead to exponential wage returns due to the power of broadcast technologies. Meryl Streep is an excellent actress, and her labor can be replicated across thousands of movie screens simultaneously. It’s not a zero-sum economy, but Streep’s presence ultimately has to supplant some other actress who would have been offered the same role.
Superstar economies (also known as tournament markets) lead to huge wage inequalities, since the winners are remunerated so heavily compared to the wide swath of workers who fail to reach the top.
The complexity for America’s labor market is that the superstar economy has expanded far beyond traditional media or athletics to all forms of professional work, a pattern exacerbated by Covid-19. Top law partners are paid millions of dollars, even as many family attorneys make fractions of that compensation. Top research professors have compensation packages of over a million dollars per year (with two at Stanford settling in above $2 million), even as thousands of faculty are paid below minimum wage at community colleges. Even among superstars, the pay can be exponentially different. Many CEOs made more than a $100 million last year, even as the median pay for all CEOs of S&P 500 companies declined to $14.5 million.
Why this expansion of superstardom? America’s business concentration is at modern records, with fewer companies competing in each market segment. That places a heavy premium on top executives. Technology (accelerated by Covid-19) increasingly offers the kind of leverage to top professionals that actors and musicians have enjoyed for years. Then there are network effects — the top talent in most fields are often valued for their embeddedness within elite networks, and that density has increased with better communications tools. A top Hollywood agent, investment banker, lobbyist or venture capitalist might once have known hundreds of people. Now they know thousands and perhaps even tens of thousands of people.
Superstardom is great for the winners, just like the young people who can now make well above minimum wage. But it’s hallowing out the labor market for everyone else.
Snapshot three: I was fascinated by this tweet from Taiwanese journalist Yian Lee showing median income data at Taiwan’s top employers including TSMC, which clocked in at $102,272 based on today’s exchange rate. A six-figure salary will take you far in Taiwan, but to put that number in perspective, Google’s entry-level software engineering salary is pegged at $184,000 by Levels.fyi. That compensation number rises to half a million dollars for staff software engineers.
The combination of Baumol’s cost disease and Rosen’s superstar effect intersect in software engineering, where web services offer prodigious profits levered from a relatively limited technical staff. That intersection has huge implications for America’s industrial policy of reshoring chip manufacturing, since electrical engineers who can design and build chips are generally able to transition to software engineering with a modicum of retraining.
To compete, chip fabs have to offer competitive salaries and working conditions against other employers, and that’s proving a tough proposition. Fortune last month highlighted early reviews of working at TSMC’s $40 billion Arizona fabrication facility, a linchpin of the Biden administration’s manufacturing efforts. The reviews aren’t pretty:
On the Glassdoor profile of Taiwan Semiconductor Manufacturing Company, or TSMC—the world’s biggest manufacturer of semiconductor chips—current and former U.S. employees swap messages about grueling working conditions. “People… slept in the office for a month straight,” an engineer wrote in August. “Twelve-hour days are standard, weekend shifts are common. I cannot stress… how brutal the work-life balance is here.” “TSMC is about obedience not ready for America,” another engineer wrote in January.
The market price for chips is set by global economic forces, but the wages paid to workers producing those chips are locally dependent. A chip engineer in Taiwan making $102,272 has an enviable lifestyle — the same just isn’t true in America.
These three snapshots offer no solutions, but rather forewarnings about America’s future strength, fairness, and industriousness. The labor market today is increasingly not bearing the cost of America’s expansive military brass, expansive creative class, and shrinking manufacturing expertise. No one orchestrates these labor markets — the effects emerge from the decisions of millions of workers. But those micro decisions aggregate to massive macro shifts that the U.S. must confront head on, and soon.
Ken Bui: GWOT = ZIRP, so we need NIFEs
Our “Securities” summer associate Ken Bui writes his first column.
Silicon Valley now recognizes that the Fed’s Zero Interest Rate Policy (ZIRP) led to risk-free environments of free-flowing money generating the worst excesses ever seen in the tech industry. But the same pattern holds true in defense — and it remains under-recognized.
The counterinsurgency wars in Iraq and Afghanistan during the Global War on Terror (GWOT), an exercise in high-tech warfare against a low-tech opponent, gave rise to insane equipment prices and a severely stunted defense industrial base that — come a war with a near-peer opponent — will show that the emperor, indeed, has no clothes.
GWOT was defense contracting’s ZIRP, and it’s time to repair the damage.
The U.S. military’s acquisitions process is broken. Out of the $773 billion requested budget for Defense last year, just under half — $344.4 billion — is budgeted for contractors. Yet, that figure is actually a downsizing from a high of $448.9 billion in 2020.
The Pentagon has repeatedly fallen victim to overcharging by those same contractors. In a 60 Minutes segment in May, Shay Assad, former Army Director for Defense Pricing, accused defense contractors of consolidating into an unaccountable cartel, egged on by the DoD:
The roots of the problem can be traced to 1993, when the Pentagon, looking to reduce costs, urged defense companies to merge and 51 major contractors consolidated to five giants.
"The landscape has totally changed," Assad said. "In the '80s, there was intense competition amongst a number of companies. And so the government had choices. They had leverage. We have limited leverage now."
The Pentagon’s monopsony and the monopolistic behavior of the companies that supply it have resulted in a losing battle for the warfighter, the taxpayer, and the engineer, but certainly not the contractors. Increasing the price of Stinger missiles by 7x, overcharging millions for Patriot missiles, even quadrupling the price of replacement parts — the exorbitant and exasperating stories of defense contracting are today a commonplace.
The issue lies not with defense contracting, but defense contractors. A strong defense industrial base relies on robust market competition, conditions that are no longer present.
Thankfully, the DoD and Congress have recognized this issue, first by standing up units like the Defense Innovation Unit (DIU) and now with $220 million in funding for a new type of Service-level unit named Non-Traditional Innovation Fielding Enterprises (NIFEs). NIFEs manage a “hedge portfolio” of “weapons systems, munitions and suppliers outside the scope of the Pentagon’s normal channels.” The Air Force’s AFWERX, the Army’s 75th Innovation Command, and the Navy and Marine Corps’ NavalX already fit the bill of a NIFE, and will likely stand to benefit from increased funding and statutory authority.
The DoD’s new acquisitions process is beginning to resemble much of the venture capital world, in a way that benefits us all. In the words of Rep. Ken Calvert’s staff:
Now it is time to scale those organizations with this new funding and new focus... the Service-level NIFE leaders must be empowered to move quickly with the authority to contract with non-traditional companies. This is how we disrupt a broken, slow acquisition system that demands a 100% solution that will arrive in 30 years if at all, rather than a 90% commercial solution that exists today.
Founders and VCs have had to rapidly adjust their approaches to building companies without easy access to ZIRP money. Now, Pentagon procurement officers will have to do the same post-GWOT, getting smarter and more flexible in order to get more and better equipment for less.
“Securities” Podcast: The p-zombie theory of consciousness
The rise of generative AI and large-language models (LLMs) have forced computer scientists and philosophers to ask a fundamental question: what is the definition of intelligence and consciousness? It’s a modern question, but also one that has been addressed by philosophers and novelists for years, as well as the occasional philosopher-novelist. One of those rare breed is the subject of this week’s “Securities” podcast, specifically the novel Blindsight, the first of two books in the Firefall series written by Peter Watts back in 2008.
Joining me is Lux’s scientist-in-residence Sam Arbesman as well as Gordon Brander, who runs the company Subconscious. We talk about the distinction between consciousness and intelligence, Searle's Chinese Room, the Scrambler consciousness test, whether consciousness is necessary for intelligence, and then for fun, a look at intelligence and the Large Language Models that have sprung up in generative AI. Approachable, but bold – just as Watts approaches his works.
🎬 Watch the podcast on YouTube
Lux Recommends
- Our summer associate Reha Mathur and our own Shaq Vayda recommended a working paper on xTrimoPGLM, the largest protein language model ever trained and whose performance beat other leading models on 13 out of 15 tasks.
- Peter Hébert recommends an FT Magazine feature on “How three amateurs cracked a 445-year-old code to reveal Mary Queen of Scots’ secrets.”
- In his first recommendation, our summer associate Yadin Arnon suggests The Economist’s look at the world of deep sea nickel mining. “A patch of Pacific Ocean seabed called the Clarion-Clipperton Zone (CCZ) is dotted with trillions of potato-sized lumps of nickel, cobalt, manganese and copper, all of which are of interest to battery-makers.”
- In a major announcement, Sasha Pines recommends the news that the FDA approved an over-the-counter birth control pill for the first time (And in case you missed it, check out last week’s “Securities” podcast episode with Fertility Rules author Leslie Schrock).
- Sam recommends Eric Gilliam’s analysis of how to rebuild deep tech venture capital investing. “The model I propose seeks to pair the practical problem selection and cost-efficient problem solving of entities like the early GE Research Lab, Bell Labs, and MIT’s 1920s Technology Plan with a modern understanding of risk capital.”
- Ken recommends Robert Bellafiore’s review of Daron Acemoglu and Simon Johnson’s latest book, Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity. “Technology is more than just tools we apply to our environment at will; it determines what our very environment is, shaping the content of our thoughts and actions, our ways of thinking, our modes of interacting with everything beyond ourselves, and even the boundary between what is properly 'ourselves’ and what is ‘beyond.’”
- Our summer associate Koko Xu recommends a transcript of a discussion between Mike Moritz of Sequoia and John Doerr of KPCB from 2008, filled with wry insight and interesting tidbits. “John Doerr: If you were starting a new venture capital fund, right now in this environment, how would you do it? … Mike Moritz: I probably would board a vessel at the San Francisco pier belonging to the Neptune Society and ask for a burial at sea.”
- Finally, I recommend Parul Sehgal’s analysis of the rise of “narrative” and “story” as a lens by which to understand society. “Story lulls. It encourages us to overlook the fact that it is, first, an act of selection. Details are amplified or muted. Apparent irrelevancies are integrated or pruned. Each decision is an argument, each argument an imposition of meaning, each imposition an exercise of power.”
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.
