Masters of the Fryolater

By Megan McArdle

Apparently, some of Wall Street's former Masters of the Universe are having a hard time finding new jobs:

The problem with having narrow skills, like being able to structure CDOs, is that if you lose your job, your employment prospects are limited. Unless you have personal connections that are willing to give you a chance at something where your skills might be distantly relevant (say being the CFO of a small company), most employers, especially large companies, want to hire someone who is already doing precisely what the job calls for. I've seen enormously talented senior people (and I don't mean from Wall Street) unable to land jobs because employers write the job specifications so narrowly.

Recall that in the dot-com bust, those who lost jobs in Silicon Valley faced similarly bleak situations, and stories abounded of principals of failed companies seeking work at the likes of Home Depot.

It is hard to be sympathetic with people who made so much money in the fat years. Nevertheless, naivetee, optimism, peer pressure and (of course) big bucks lead young people to chose these high paying careers and not consider how risky they are. Even though Wall Street's cyclicality is well known, many assume the cuts will happen to someone else, and if something bad were to happen, they could always find a job on the buy side. They are learning otherwise.

One interesting thought is that the two current banes of left-leaning economists, income-inequality and "jobless growth", may be linked. 

The best current thinking on income inequality is that it represents a dramatic structural change in the distribution of returns to skill--that many labor markets have turned into tournaments.  This has boosted the return to rare human capital, relative to more general skills. 

This hyperspecialization may be contributing to what I think is the best current explanation of the tendency for recent recessions to be followed by jobless growth:  a shift from cyclical unemployment to structural unemployment.  According to this theory, in recessions before the 1990s, recessions used to be simply a matter of contracting aggregate demand, and companies reacted accordingly--laying workers off during the downturn, then hiring them back as demand picked up.  But during the 1980s and 1990s, recessions took on a much more industry-specific character.   Changes in technology and trade meant that entire industries or job descriptions contracted, often permanently.  The workers they laid off, with their specialized skills, took much longer to be reabsorbed by the labor market.

What Yves Smith is describing fits that model.  Both employee and employer are trying to maximize the returns to skill by looking for very specific matches; failing that match, they drop out of the pool entirely until they can find some other form of work. 

At least we can take comfort in the notion that income inequality is probably falling . . .

This article available online at:

http://www.theatlantic.com/business/archive/2008/08/masters-of-the-fryolater/3983/