Transaction Costs (Part 2)

In this Part 2, I hope to dive deeper in to the various scenarios that would result from a massive decrease in transaction costs. Considering we went over the pro’s of such a reduction in the last post. I’m going touch upon it again and move on to addressing the various labor market concerns one might have with regards to a decrease in transaction costs.

As discussed previously in my personal opinion the most interesting facet of lower transaction costs could play out in its effect on the labor market. Given how dependent the sharing economy is on categorizing its workers as contractors rather than employees, it’s a trend that’s only going to increase in magnitude. The other issue here is also with the historically high number people working part- time that would rather work full-time. The Bureau of Labor Statistics’ latest report shows an uptick in full-time jobs, but it’s still relatively lower compared to before the financial crisis. A NPR/Marsist poll for example showed that 1 in 5 people employed right now are categorized as contract workers. While there’s nothing inherently wrong with contractual work, the benefit disparities are quite obvious. Only 32 percent of contract workers have a retirement plan compared to 60 percent for full- time workers. And the numbers are even worse for part-time workers.


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With transaction costs decreasing over time, the labor market effects will be far reaching. Total factor productivity (TFP) in the US has been on a downward spiral ever since the 90’s. Part of the TFP slowdown could be down to how hard it is to compute the various modalities associated with productivity growth and the recent decrease in IPO’s. The other issue with the slowdown in productivity growth could also be due to issues within the tort system. For example the state of Texas would save $2509 in tort cost reduction and see an increase of 0.54- 1.46 percent in employment numbers if it initiated significant lawsuit reform, according to ILR. But the most significant cause of low productivity numbers might be the decrease in the numbers of start-ups. Compared with population growth especially, there’s been a significant decrease in the number of young firms. The lack of entrants in any society leads to inefficiencies even after controlling for economies of scale.

Given the low productivity numbers, lack of new company openings, future impacts of automation. A massive decrease in transaction costs, could lead to a significant a decrease in full-time employment numbers. On the flip side, a case could be made that a greater role for the sharing economy would increase labor mobility. While there are quite obvious negative ramifications of a decrease in full-time employment, the U.S economy’s structural benefits primarily lie in its ability to encourage greater labor mobility. One of the reasons why the recovery from the great recession was quite tepid for a long time was due to low labor mobility. Labor mobility allows workers to find better suited jobs across the economy that increases job satisfaction and productivity.

Overall, while a reduction in transaction costs has its benefits, the shortfalls are quite massive. If a reduction in transactions costs does lead to the kind of future Munger envisions, it’ll be quite a break from the system we’ve grown accustomed to in the last 200 years. Our future might just depend on how we adjust to it.




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