Lifetime employment

· November 9, 2018

Transaction Cost Economics and Organization Theory is a somewhat dense, but interesting, paper on the overlap between those two fields.

One of the examples used in passing gelled with some the things I have been thinking about this week. The note was about lifetime employment in Japanese firms, and how subcontracting, banking and unions of personnel and firms combined to support lifetime employment by mitigating it’s hazards, namely:

  1. Economic adversity
  2. Shirking by workers
  3. Layoffs
  4. Equalitarian pressure to offer lifetime employment to all at the firm

The layoff threat was an interesting one, as part of the exchange of lifetime employment was the investment by the employee in firm-specific skills and knowledge. A firm that lays-off a worker who has invested time to develop capacity within the firm is breaching an implicit trust.

Outside lifetime employment this pressure is still present, though on a lesser scale. Most of the time when we talk about training we don’t distinguish too much on what is being trained, but in every piece of training there are aspects which are market-valued, and aspects which are firm-specific. 

Outside of designated training, there is often a similar choice when on the job, or making internal mobility decisions, particularly for knowledge work. As a junior member of the finance team how much time do you spend learning about a nuance of the company’s financial controls versus a broader regulatory requirement or some piece of Excel wizardry? Making that trade off requires making a judgement about your tenure at the firm, and the potential long and short term benefits (though, is likely made with heuristic approximation and not a whole lot of thought). 

When I look at my own day to day, some of the foundational knowledge I have that makes me effective at my job is broad-base technical and industry knowledge. Simply by being broad based it is less differentiated from others, and much of my effectiveness comes from highly context specific knowledge and experience. 

I suspect there is a high road and low road way of approaching this too. Low road would result in optimising for marketable skills regardless of outcome, or optimising for firm-specific skills to try and become indispensable. The high road approach would be focusing on outcomes within the firm while bringing in more externally valued ideas to avoid tunnelling on inside-knowledge. 

Firms can encourage or discourage this - golden handcuffs, retention bonuses and idiosyncratic technology and processes incentivize people to optimise firm specific knowledge. Industry standards, openness and transparency, and hiring at all levels promote more of a market valued approach. 

Netflix is a good example of a firm who have taken the latter approach, in everything from open-sourcing a lot of their technology to encouraging their employees to regularly interview elsewhere. They also compensate at top of market, which is largely necessary for a company where employees are mainly optimizing marketable skills.