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Labor Market Making

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Executive Summary

in the same way that a commodities market maker ensures liquidity in a market and reduces the chaos that might be caused by low participation in a market, is there a way to formulate a labor market maker? Can this same concept be applied to the labor market?


Let me first say that my knowledge of financial engineering consists of a read through a couple chapters of John G Hull’s Book . That is: I’m no expert. This post is a vehicle for me to learn more about what constitutes a market.

(My) Introduction to Market Making

Exchanges make money when a trade occurs—that is when someone is willing to buy at a price and someone is willing to sell at the same price. The worst case for an exchange are when there’s a buyer and no sellers or when there’s a seller and no buyers. The exchange makes no money on commission, yet has at least one party ready to trade. As a result, exchanges will contract with market makers: firms whose sole job it is to post a bid and offer price.

Market makers are generally required to post these prices at a certain frequency throughout the day. The price doesn’t have to be attractive to the exchange’s other customers, but at least there’s someone to trade with.

Market Making Scenario | Time-Shifting

In the morning, an independent seller shows up at the exchange and get rid of her contracts in paisley-print shirts (a lesser-known commodity, used as an example). There may be no independent buyer. If the seller is motivated, she will trade with the market maker (no doubt at a price that’s attractive to the market maker).

In the afternoon, an independent buyer shows up and decides paisley-print shirts are the way of the future. (Apparently, this scenario took place in 1988). As a result, he buys the contracts from the market maker (once again at a price that’s attractive to the market maker).

What has essentially happened here is that the market maker has facilitated a time-shift of the transaction.

Indeed, the market maker has benefited from this composite transaction. However, the market maker provides a service to the exchange and to the traders: the market maker evens out the fluctuations that are caused by variations in trader presence. That results in less chaotic (and more predictable/observable) markets.

Crazy Idea

So, I was wondering to what other markets this time-shifting concept could be applied. What I’m about to describe is not market making. However, since the inspiration came from market making, so this post is titled along those lines. It’s probably more aptly titled labor supply/demand time-shifting—but that isn’t very catchy.

The number one thing on my mind these days has been the labor market—more specifically, my friends that are out of work. It’s reasonable to believe that engineers will be in high demand sometime in the future (as they have for decades in the past). However, right now, there seems to be an excess supply of engineers.

What if there were a labor market maker to buy up the excess supply? This entity would take the excess engineers off the market (at an attractive price) and then “sell” them to bidders later (once again, at a relatively attractive price). The end result is that the market would be more stabilized: there wouldn’t be massive unemployment now and then ridiculous wage inflation later. The ebbs and flows would get evened out.

What’ I’m Not Proposing

I’m not proposing slavery: after all, the intent of this market formulation is to benefit the engineer/worker. I’m not proposing that we buy and sell people. I am proposing that we buy and sell the output of talent (and maybe the propensity to produce output). I’m purposefully glazing over how you’d do this without having the worker leave at exactly the moment when you need him/her most—when he/she is most valuable. I’ll return to that subject later in this post.


There are two approaches that one can take (which are respectful of individual dignity):

1. Occupation

2. Education/Investment

Occupation: One could “hire” the excess talent to produce something. So, instead of treating the worker as a security, one is treating the worker’s output as the security. This is basically what a lot of start-ups do in down markets: they group together people that make something (“the product”). In many cases, the start-up gets sold (in fatter times) and the buyer doesn’t really care about the the product; they care about hiring the talent that produced it.

Education: One could invest in the excess talent (or a proxy for it) to improve the marketability of the person involved. However, this is clearly not market making: in our sample scenario, the market maker did nothing with the paisley-print shirt contracts and merely bought early and sold late. Nonetheless, one way of accomplishing this is to hire workers, send them to classes, and put them back on the job market. This would be the role of a novel type of head-hunter. The trick is that the worker needs to sign a contract that they either follow your job placement or pay you some money to get out of it.

Where This is (Almost) Done Already

As I pointed out, start-ups occupy (exploit) workers in down markets and reward them in good markets. The government also does something similar by paying unemployment—but it sort of works in reverse. The employer contributes unemployment insurance during good times to reduce the effects of unemployment during bad times.

Some recruiters will help you with your resume to improve your marketability. A really good recruiter would form a long-term relationship, giving you advice in the hopes that you’ll utilize his/her service when demand for your talent swells. One could imagine a recruitment firm which specializes in building such long-term relationships and either relies on the loyalty of their clientele or holds them to legal contracts. (Think Jerry Maguire.)

Temporary employment agencies do something similar: they’ll “sell” you someone without your specific skill requirements at a relatively cheap price. Many times, this temp worker gains on-the-job experience and becomes more skilled. Eventually, temp workers are “released” to the company as full-time employees. (I’m not saying this scenario is typical; I’m just saying it happens.) If the worker does not initially work out, the temp agency substitutes someone else. In that respect, the temp agency shields its client from the risk of not having a worker available.

A college loan is similar to the education investment: a payment is made to a student to help improve his/her marketability. Later, the more valuable graduate can pay the loan back.


I’m still not satisfied that there couldn’t be something closer to a true market maker: someone that works to time-shift the supply/demand and better align them, while at the same time maintaining the dignity of the individual worker. Perhaps it isn’t possible because fundamentally people cannot be traded as commodities: commodities cannot just decide to leave simply because they don’t like their steward. However, I’d still like to see some vehicle that helps contain the excess supply of talented labor while being beneficial to both the worker and the market maker.

I’m proving something I sort of knew already: the most important resource a company has is its workers.


I ran this past someone with much more finance knowledge than I. He aptly pointed out that you can’t guarantee a person’s future output (unless you are that person—and even then, it’s tricky). If you force someone to work for you without any upside, they aren’t going to work that hard. As a result, you are selling something you can’t guarantee: a worker’s productivity. Even if you hold them to a contract, there is no way to make them work hard if they don’t want to. Contrast that with education and start-ups, where the individual does benefit directly from his/her investment.

So a key part of this scheme must be that the individual worker benefits from his/her talent. I wonder if there are any other necessary conditions (even if they are impractical).

Written by PoojanWagh

June 16th, 2009 at 5:57 pm

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