The Employees:
Paul has 14 years of experience in product marketing with SaaS platforms. He has a B.S. in Computer Science and had been the Director of Product Management for the past 4 years. He was recently laid off and is looking for work.
Peter has 8 years of experience in product marketing with SaaS platforms. He has a B.S. in Electrical Engineering and had been the Senior Product Manager for a small health care platform company for the past 4 years. He was recently laid off and is looking for work.
Peter and Paul live in the same city.
The Economics:
All markets have supply and demand curves that meet at a price equilibrium point where the consumer maximizes their utility and the supplier maximizes their price. In the jobs market, employees are the supply and employers are the consumer of that supply (employment). Consumer utility is the absolute satisfaction that can be had from a product or service dependent on price. In the jobs market, an employer’s utility is determined by the absolute satisfaction an employer has with an employee’s performance based on compensation.
The rudimentary supply and demand curve
Employee performance is easy to measure once the employee is employed, but difficult to gauge prior to the employee being hired. Education and job history are usually the stick in which to measure an employee’s potential. If the job the employer is trying to fill requires an undergraduate degree, 5-7yrs of work experience and 2-3yrs of industry experience, then a resume can quickly qualify an applicant and provide a strong forecast of how much utility the employer will receive.
Employees, in an attempt to participate in capitalism and grow their economic viability in life, will generally try and make a vertical move when switching companies. This means, an employee who was a Senior Product Manager will apply for Director of Product Management positions to increase pay, skills and overall quality of life. The employee is always seeking to sell their services for more money, which means they must find the demand that will support the new price i.e., a new position, a new city or a new industry.
Because of the vast numbers of unemployed, the jobs market has become what is known as a “buyer’s market”. Employers have access to hundreds of thousands of highly mobile employees and because the supply is so abundant, employers maintain the power over pricing. The vast number of the unemployed have also created a situation where employers, in an attempt to get the most utility from an employee, are hiring overqualified professionals to fill positions.
This is indicative of the breadth of the recession that the US is in. Many middle to upper managers are now applying for non-management positions, positions they held 3-5 years in the past. Employers, having the same issue that many consumers have when it comes to a “sale”, are buying a product they don’t need because they can get such a good price for it. The difference is a consumer will continue to find utility in the product, where an employer will never have the employee. An overqualified employee will never be off the job market.
Paul and Peter are competing for the same jobs as Senior Product Managers. The problem is that they should not be competing. They should be in different markets. Paul, the overqualified professional is artificially inflating the jobs market for Senior Product Managers. This is bad news for Peter. The abundant supply that is entering the market because of the 10% unemployment is enough to shift the supply curve from S1 to S2.
This shift has put pressure on prices. It also means that an employer, seeking the most utility for the price, is always going to buy the overqualified employee. Essentially, the employer is robbing Peter to pay Paul.
