Episode Transcript
Speaker 1 00:00:07 Okay, everyone, this week I want to talk about economics for two reasons. One is this fascinating to me, but the second is really that it's really important to you. And some of you are probably very steeply versed in this and some of you are not. So I wanna give you some perspectives on what it is going on from an HR perspective. There are three fundamental branches of economics. Economics, of course, deals with the flow of goods and services, the prices, the economy, economic growth, employment, all those things that we're very much a part of in hr. And there are three branches of this. One is called macroeconomics, where we deal with the big numbers around the world, the economy itself. The second is called microeconomics, which is the economics of companies, which is what we do a lot. And what you do in is you deal with the economics of your company relative to the economics of the broader economy.
Speaker 1 00:00:59 And then there's what's called behavioral economics, which is a relatively new branch, which talks about the issues of psychology, which are a huge part of the economy. And the economy is very, very interesting topic for many, many people because it affects investments and hiring decisions and growth plans of different companies. There's a story out a couple weeks ago that amazon.com has 400 PhD economists in the company, which is astounding to me, but it gives you a sense of how important this discipline is. And it affects HR because one of the things that's fundamental to the economy is the role of labor. There's a fundamental theory that you'll hear about if you take economics courses, that there's really two drivers of business capital and labor capital being money and investment labor being humans. And what we do to add value to companies, and those of us in HR are very much of the thinking and understanding that the human value add of companies is predominantly what companies are about.
Speaker 1 00:02:06 But, but you know, economists don't see it that way. They see the role of capital just as important as the role of labor. So we're a very big part of the economy, whether you like it or not. And we're a very big part of the economic discussion. Now, there's vested interest in the economy by different spokespeople. And if you turn on C N B C, you'll see them interview economists all day. But you'll notice that most of the economists, many of them are not in the federal government. They're working for banks. The economists that work for banks are truly economists, but they're also salespeople. So one of the things they do is they give you a story that they're also giving to their clients to encourage their clients to buy things from the bank. I mean, the funniest thing of all for the last year has been every economist, including Krugman and all of them have been forecasting a recession.
Speaker 1 00:02:59 There has been no evidence in my mind of a recession from the beginning of this since the end of the pandemic, none. I mean, economics growth has gone up, inflation has gone up, employment has gone up, economic activity has gone up, wages have gone up. I don't know why everyone was forecasting a recession. I think it was behavioral economics among economists, to be honest. And of course the Fed and the US and the European Federal Reserves had to raise interest rates to slow down the inflation because the inflation was really hurting a lot of our psychology about goods and services and what to buy. And it hurts the political system when we have inflation, people don't trust the government anymore. So the interest rates have been going up, but that actually is a very normal thing. That wasn't a strange thing at all. We had near zero interest rates since the 2008 recession.
Speaker 1 00:03:58 And you know, in my mind, 2008 was a real recession. I mean, you know how bad that was. The economic slowdown that happened during the pandemic wasn't really a recession. Consumption didn't really go down. We just changed the way we bought things. We didn't stop buying things, we just tried to find new ways to buy things. So companies found new ways to serve us. And uh, and then as soon as all of the fears of the pandemic started to go away, people went back to work. And now we have this whole ongoing argument about hybrid work and the economy keeps growing. So when you read something from an economist, take a look at who that person is and why they're saying what they're saying. There's a lot of numbers thrown around and a lot of arcane numbers. But the fundamental issue that happens is very, very simple.
Speaker 1 00:04:46 And that is that people who buy things, which is us, look for things to buy to live, whether that be a house or food or education, or a car or transportation, whatever it may be. And we wanna have fun and have a life. We want to use our money to do enjoyable things. On the other side of that, there are companies and the government that produce goods and services that we buy. And when we buy things that are rare and hard to find, the prices go up. When we buy things that are in surplus, the prices go down. And companies do everything in their power to differentiate their products and drive prices up. That's their job. And we as consumers shop around and try to drive prices down. And so there's this very interesting constant dynamic going on between the consuming behaviors and the producing behaviors.
Speaker 1 00:05:42 And those of you that have run companies before, you know, basically fundamentally what companies do is they're always looking for ways to differentiate themselves, to build barriers to entry, to to lock customers into the things we sell so they can't buy from anybody else. There's a lot of that that happens, by the way, it's, it's kind of illegal, but not really. It's very, very common. And then to monopolize our domain so that we don't have a lot of competition, which eventually becomes illegal too. And then in the middle of all of that, there's employment and there's a number called the unemployment rate, A very important number. And it's essentially calculated by the Bureau of Labor Statistics using surveys. By the way, it's not a very precise number. It's only precise in the sense that they've done it the same way for a long time. So you can track the trend, but they do surveys to try to figure out what percentage of people are out of work and looking for work, not out of work, and not looking for work, and what percentage of people quit and what percentage and how many new jobs we're creating each month.
Speaker 1 00:06:41 And all of that data's out there. And every month there's a new, you know, release and all sorts of people go in and analyze it and try to figure out what it means. People in the investment community, like to C N B C types, they wanna buy and sell things very, very quickly. They're not looking at long-term trends. So they will oftentimes comment on things very, very quickly that this week's numbers, how interest rates went up or down. For those of us that work in companies, the day-to-day activities not that important. It's really the, now the other part of the economy, of course, is interest rates. And interest rates are essentially the breaks that we put on the economy, the friction to both slow the economy down and to represent the value of money. When you go out and you want to raise money capital to buy something or to build something, it's not free.
Speaker 1 00:07:34 And the person who has the money expects you to pay them interest in exchange for the money. Believe it or not, interest rates were zero for a while. In fact, they were negative. And that was the weirdest thing. The reason for that was the government was trying to stimulate consumption and give people more money to get us through the 2008 recession, which was, which was very disruptive. And then to some degree also, Donald Trump did it. So he would get it reelected, which he didn't, but he tried. And then we did it again until the pandemic. And then finally we had the inflation and they raised the interest rates to slow things down. So we're in the middle of a cycle right now of trying to stop the inflation through raising of interest rates. Now, the theoretical construct around interest rates is that when interest rates go up, employment goes down.
Speaker 1 00:08:23 Because theoretically, if you read an economics book that slows down companies buying, it slows down, companies investing, and then it slows down, companies hiring. But strangely enough, this particular period of time, the unemployment rate is going down and staying down as interest rates go up. It's very non economics, it's not standard economics. And we know that the reason for this, as you've heard from us, is because of this post-industrial economy and the shortage of workers. We have, have the number of workers in the United States at least and around the world, is going up, but a slower and slower rate because people are getting older and we're not having as many children and people aren't graduating from college as many. So we have a shortage of people and therefore the unemployment rate is low. Now, the government is in a bit of a quandary about this because they'd like to raise interest rates to slow down inflation.
Speaker 1 00:09:18 And they believe that one of the reasons we have inflation is because we have a low unemployment rate. And when there's a low unemployment rate, companies have to raise wages to hire people and that causes inflation. That's not happening this time because of the factors. I mentioned earlier that this is not an economics driven low unemployment rate. There's a low unemployment rate because a lot of jobs are changing, a lot of skills are changing, and we need people that are simply not ready for these jobs. So some of the fundamental things you read about in the economics books are not exactly the way things work today. So anyway, that's a 10 minute really fast intro to all of the basics. Now, what does it mean to us in HR and what's going on? Well, the thing that I think that all you guys need to just be aware of is every company you work for is a macroeconomic case study.
Speaker 1 00:10:14 Your company itself is in some sense, and its customers and, and suppliers is a little economic system. When you have a shortage of supply and you need more, say, people or parts, you end up having to pay more for that. And your prices go up and your margins might go down. When you have, um, a surplus of demand for your products and you have more and more revenue and earnings coming in, you'll try to grow people and hire people more quickly, and that would lead you to raise wages. Now, we are very much in the middle of the discussion about wages here in hr. And most companies don't like raising wages. It's an expense. They don't think about it as an investment, even though they probably should. Certainly professional services firms think about it as an investment, and we do, but a lot of companies don't, and they wanna make sure they're getting their money's worth for their human capital investments.
Speaker 1 00:11:16 So they will tend to raise wages slowly, and that's what's been happening. Now, wages have been going up around four, four and a half percent, which is actually pretty high, but inflation's been more, more like five, six, 7% in the uk it was even higher. So we're stuck with this little microeconomic problem of how do we keep our micro economy of the company, the people that we pay equal or fairly compensated for what's going on in the rest of the economy. Now, the way you do that, it's not by paying people more and more money, but by adding value in other ways. And as you know, one of the economic drivers of employment is that people actually don't only work for money. They want enough money to pay for their basic goods and services, but they want a, they want a good job, they want a good boss, they want a career, they want to learn things, they want to have fun at work, they want flexibility.
Speaker 1 00:12:12 So all of this ridiculous de debate that's been going on about hybrid work is a little bit lost on me. This, this is a form of remuneration where people want flexibility because they have a life. They don't wanna be in the car all day commuting just because the c e o wants 'em hanging around the office. And the study that came out recently this week in the Wall Street Journal shows that the companies that provide flexible work are actually attracting better candidates and more easily attracting candidates. So your economic system and your company is part of what you do in hr. And so if you're debating with the C E O or the C FFO about hybrid work, you're actually debating the economic formula that will drive people to join you. By the way, that's true of skills development and career development. And you know, a lot of the things we do in HR in some sense are little microeconomic decisions that we're making in our companies to improve our performance by being more competitive in the job market.
Speaker 1 00:13:14 Now, I gave a speech at our conference and, and we're gonna be doing a lot more on this, covering this topic we call the post-industrial economy. And the story is, it's about a hour long speech, and we're going to show you the video soon of the replay. But essentially the story is that the way the economy used to work in the 17 hundreds and the 18 hundreds is we had mostly a, and first we had an agrarian economy. And the funny thing about the agrarian economy was there wasn't a lot of economics of scale. So all of the farms had roughly the same economic system and you just had to hire more workers to get stuff to market faster. Well then along came machines and harvesters and later automobiles and trucks in the industrial age. And all of a sudden the companies that made more money were the companies that were more industrialized and they became more productive.
Speaker 1 00:14:08 And they built business models about what, around what was called industrial scale. We call this an industrial scale business model. Industrial scale business model is a company that manufactures something or produces something and sells it at volume. And the more they sell, the cheaper they can produce it. So the more they sell, the more money they make. Oil companies are like that. Automobile companies used to be like that. Manufacturers, many, many companies that have differentiated products are like that. Retailers are slightly different because they're kind of in the middleman business. But so that was the industrial economy. And during that period of time, starting essentially with slavery, by the way, we built companies, microeconomic systems that were hierarchical. And we, we felt and found out and learned that if we had a hierarchy, we could hire lower level workers, which we called labor, pay them a little bit less, maybe not pay them very much at all.
Speaker 1 00:15:05 And the managers and supervisors who moved up the corporate pyramid could direct them and create more and more and more scale, because scale was to what drove profit. We didn't want 'em high price people walking around 'cause we didn't need them once the products were manufactured. Now, sometime in the late 1980s and 1990s, that started to change and the internet and other forms of communication sort of disrupted this idea of industrial scale because people started to move from company to company and they took their ideas with them. So if you're a GE and you learned how to make dishwashers or whatever, the stuff that GE used to make, well, you know, Samsung, Westinghouse, they all could make the same stuff. So all of a sudden your industrial scale thing didn't work so well. Now you had to compete on innovation, on product features, on better customer experience, maybe on service, maybe on repair quality or whatever.
Speaker 1 00:16:04 So all of a sudden this scaling economy moved to a service economy. And we've been watching and being a part of the service economy now for many decades where the companies we do business with and we like, are not just producing great products. They have to do that. There's no choice there, but they serve you well, they work well, they support you, they repair them well. They give you consulting or advice or whatever it may be. And you know, in our company for example, we are not an IP company only. We don't just sell research and walk away. We help people with it. We're very much in the value add, uh, service oriented part of what we do. That's why we're so good at what we do, frankly, is because we talk to you guys and get so much feedback from you in the work that we do with you.
Speaker 1 00:16:50 And that's true around most companies these days, software companies, consulting companies, retailers, all trying to become more service oriented. And that is a new form of economy. The service economy doesn't have industrial scale capability features in IT. Service companies differentiate themselves on skills, on agility, on energy, on human qualities. So in this new post-industrial age, we need to hire people that can do much, much more and have much more capabilities and much more potential and grow them. And so as you'll see as we go through our launch, we're, we're gonna do a big, by the way, lots of research and producing more information on this, that in the post-industrial age, the company has to be much more flexible and agile and adaptive. That's an economic change. That's not just HR thing. That's the nature of where the economy has gone. And AI is gonna make this even bigger because what AI's going to do is power you and all of the other individuals in your company as what I call super workers, where you're gonna have access to more information and more advice and more training and more education than ever before in an easier and easier way.
Speaker 1 00:18:05 And so this shift from the agrarian economy to the industrial economy, to the service economy, to this new information or intelligence economy, is going to go faster and faster and faster. And one of the things that you'll see as I go through the data and I show you is that happens in this microeconomic change is not only do we have a shortage of workers, and that's partly driven by demographics, but we don't need as many workers. And so the number of human beings required to deliver a dollar of revenue is going down. You know, the revenue per employee of Google is, I think 10 times higher than a lot of small manufacturers. It's certainly three to five times higher than a lot of companies. And that's because they are essentially a post post-industrial company. There's very few companies that have done this as successfully as they have, but within each of your companies, the industries you're in, you're all going through the same transition.
Speaker 1 00:19:02 And it's a very interesting thing to think about relative to hr. You know, I've only, I've already talked for 20 minutes and I, I don't wanna go for two hours, but let me just mention a couple of more things. When, when we think about what we do in HR for employment brand or pay equity or diversity and inclusion or career management or capability academies or performance management or whatever it is you're working on, I know you guys are working on all of that stuff. And we poke around and we try to figure out what other company's doing and we talk to vendors and we look at tools and stuff, we can get distracted, distracted from the fundamental issue, which is the economic problem you're trying to solve. And the reason I use the word economic, because it is sort of an economic problem. If you want to build better careers inside of your company, somebody's gonna ask you why.
Speaker 1 00:19:56 What are, why are we doing this just to keep people happy? Well, okay, that's nice, but what does that mean to our company that people are happy? So all of these things that we do that feel like must do, HR initiatives are actually rooted in some economic problem that we have now. I just spent two weeks, or really three and a half weeks in Europe and a week with a lot of clients. And one of the things that came up, we talked about ai, we talked about all this other stuff, recruiting, et cetera, is what is the problem? Do you know as an HR person the business problem or the economic problem that your company is facing and therefore the contours of the solution you're trying to build. If you don't know that you're going to have a hard time getting money for your project and you're probably gonna have a hard time succeeding with your project now.
Speaker 1 00:20:51 So this idea of going back to the fundamental economics is really core to what we have to do in hr. We call it falling in love with the problem. Let me give you one very, very interesting, relevant specific example. We are having fascinating conversations with companies about ai. We've had three or 400 companies join us for this big reset group. We're talking about training, we're talking about the role of employee experience, the role of ethics, diversity, um, how AI helps with service centers, how AI helps with recruiting, with talent, mobility and so forth. And we're going through the technology and the business issues companies are facing. What we keep hearing from many of you is we wanna take advantage of AI tools. So we're going to buy such and such a vendor or such and such a tool because we think it will really be important to us.
Speaker 1 00:21:45 Well, maybe it will be, but maybe it won't be if you don't know what problem you're trying to solve. And as you know, in the world of hr, everything that you buy or build that's new requires change. It requires training, it requires rethinking of the job, the job model, the job architecture. So right now, 2023, 2024, as we deal with this tsunami of AI related stuff, you have to go back to fundamental economics and say to yourself, why are we buying this? What do we expect to get out of it? How is it gonna help us with our post-industrial economic strategy? How is it gonna help us differentiate ourselves or hire better people or improve margins or increase productivity? And if you think like an economist, you'll be better off. Now, you know, there's many, many other interesting ways to think about this, but I want to encourage you to do this because the rate of change in HR is accelerating.
Speaker 1 00:22:51 There are startups coming after us like I've never seen, I don't remember it being this way for quite a while. New ideas, new concepts, new prototypes, new solutions. And you are going to be flooded with these things, the HR tech conference in October in Vegas where we're gonna be doing a bunch of stuff. Also, the Unleashed Conference the following week in Paris is going to be maybe the largest one of those conferences that's ever happened. That's certainly what we're hearing. The reason for that is the technology transformation to AI related tools is here. Now, by the way, I really encourage you to read our research book on the deep dive of AI because you need to understand what this is and not be intimidated by it. One of the things we've seen in most of our conversations is many, many HR people just aren't sure what we're talking about.
Speaker 1 00:23:42 And so they're not sure the impact, but this is going to be an economic change in your company and your business models and it is gonna affect the economy as a whole. Going back to macroeconomics for a minute, it's kind of interesting to me that as we've gone from a world of a surplus of workers to a world of a shortage of workers moving from manufacturing cost efficiencies to service related business models and companies, along comes ai. And AI really is in some sense the solution to this new economy. And I think that's one of the reasons it's picked up speed so fast is there is a fundamental need for people to get more work done in a service related way with more information and spend less time futzing around with our PCs, looking for data, writing spreadsheets, whatever, to try to do whatever it is we wanna do.
Speaker 1 00:24:37 I'll tell you a story I've been going through right now that's actually very frustrating. My mother died in May in her mid nineties. She was a fascinating person, lived a very long, very rich, very exciting life. We've been going through the distribution and sort of settling of her estate and we're trying to get the money out of the banks where she had her CDs. I can't tell you how difficult this is. And a lot of you work for banks, there's a certain process for this. It takes a little bit of time. The money has to be put into a new trust. And most of the banks we talk to, the person we talk with, I'm not gonna mention names, doesn't know how to do this. And my wife and I and my brother are infinitely frustrated with this process. In fact, it's so frustrating. I'm seriously thinking about getting in a plane and visiting some of these banks to figure out what's going on.
Speaker 1 00:25:30 It's not massive amounts of money, but it's enough money for me to care. And I'm thinking to myself, okay, I'm running a bank. I have lots of customers who die it. It's gonna happen all the time. This is a big part of the business of running a bank, of transferring assets into people's new trust when they die or giving them their money to their heirs. Why is it so difficult? And I don't know, I don't know the answer. They don't care. They don't train people, they don't provide good service. I'll tell you, some of the banks she did business with are very big banks. I'm not gonna mention who they're, I am not gonna do business with those banks ever after going through this process. So this issue of economically taking care of the workers and thinking about the productivity of your company in this new service economy and understanding the fundamental of economics is a really, really big thing to think about in hr.
Speaker 1 00:26:27 I know this wasn't a typical podcast that I normally do, but I just sort of felt like it was time to bring this up because the macroeconomic guys have suddenly capitulated that, Hey, we're not gonna have a recession. After all, we told you there was gonna be one, but we finally figured out that maybe there isn't gonna be one. So you can see that this is a difficult domain and as important as it is, we have to stay on top of it. I hope this was helpful. We actually have a lot of information on the economy and how this all works in the J B A I really encourage you to join the G B A. We're gonna be launching a massive new release of the J B A a little bit later this summer, but the, the content volume and quality in there is greater than ever, better than ever.
Speaker 1 00:27:14 You know, the net promoter score of the J B A our academy is almost a hundred percent. Almost every person we surveyed said they would recommend the J B A to their peers. So it's a fantastic opportunity. And for those of you that are not corporate members or for some reason know, wanna be corporate members, join the J B A and you'll get just an amazing amount of information about this and other things. Um, I hope this was an interesting podcast. I thought I'd give it a shot. I look forward to hearing from you and have a great summer. Bye.
