With the microphone and with recording devices [for example], you can reach the whole globe. So, that’s a huge improvement in productivity of a singer. But it makes the quality, the talent as well as hard work absolutely essential because there’s going to be enormous competition to be the one singer who takes care of the whole globe’s sales, all the customers out there. And then you get a highly unequal income distribution because you have the few people who have the talent, do the hard work, become exceptionally well off and you have other people like waiters in Los Angeles restaurants, who aspire to be entertainers and hope they’re going to become entertainers, but in the meantime, they’re left behind.
So, I like the word, ‘It’s Detroit versus Hollywood.’ Detroit is top down–meaning that you have a workforce that does what their manager tells them to do, top down, more egalitarian community. [e.g., The forklift removes physical “talent” and equalizes the output of most workers.] Hollywood is bottom up–highly unequal society. For bottom up the last thing you want is innovative people to do what the bosses say. You want to turn their creativity loose and see what results. So, that’s a bottom up. And then because their work can be communicated to such a huge audience and the result is only a few of them are going to have those audiences, the income inequality is very extreme.
So, what I have raised is the question: Are we turning most of our labor markets from Detroit-style labor markets into Hollywood-style labor markets because of the computer?
That was Ed Leamer on the EconTalk podcast, “Manufacturing, Effort, and Inequality.”
The modern defense industrial system was developed during the Detroit heyday. Even though DCMA doesn’t negotiate individual wage rates, it does negotiate average wage rates for certain categories. And of course civilian and military pay bands are given by Congress.
Suppose a business unit of a prime contractor wants to form small teams of superstars with total compensation equal or better than at top commercial tech firms. Then in order for the average wage rate to be in the realm of acceptable by DCMA, or competitive with other primes, they may have to underpay other teams. And those teams would probably know it.
Another problem for defense primes is that independent efforts are fairly small, so most likely the superstars would not be able to take initiative on decision-making. The defense acquisition process has long planning periods which constrains the creativity of talented team members. Not being able to fully contribute their talents in the defense industry, it doesn’t make sense to pay them the going rate.
Another issue is equity compensation. Even if a defense prime decides to provide workers equity, most of it is tied up by current owners and it’s not as exciting because they are mature firms. Talent may be more willing to take risks to achieve high returns by founding or joining a startup. This may be the only recourse as the government and mature firms are much less likely to be able to fund “creative” projects, which are necessarily speculative and even likely to fail.
That’s a few ways of looking at the workforce issue implied by Ed Leamer. In the end, I don’t think the government should be pushing the upper-end of the pay bands and competing in that way with top tech firms. Two recommendations. First, making it easier for new firms to scale and compete with large incumbents. That would attract talent and VCs. Even if wages are constrained, the prospect of new sources of equity can be alluring. (Naturally, it comes at the expense of other firm’s equity). Second, the government and its contractors are too big an industry to simply “compete away” talent. It’s number one initiative should be increasing the pool of talent, and then empowering the workforce to use their knowledge. Focus on the inputs, not the outputs.
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