Andrew Kortina and Namrata Patel recently published an intriguing essay called, Kinky Labor Supply and the Attention Tax.

They begin by talking about declining labor force participation rates, particularly among young men. Remember that the participation rate is distinct from the unemployment rate. Here is a chart from the essay:

Participation is down for young people, but up for older people. This is perhaps signaling that older demographics still need to work in order to maintain certain needs and/or a particular lifestyle.

The possible explanations for this declining rate among young people are interesting. The authors argue that it is a combination of the declining cost of media entertainment content and the amplification of social status signaling, among other things.

The declining cost of online content has meant that this form of leisure activity has become incredibly cheap, if not entirely free (beyond the mostly fixed cost of an internet connection). So there’s always something enjoyable to do.

At the same time, the authors argue that once people make enough money to satisfy basic needs, there becomes a tradeoff between trying to make more money and simply spending more time on leisure.

Historically, the motivator to make more money has been arguably associated with social status signalling through conspicuous consumption. But with the advent of social media, we are all now signaling globally, instead of just locally.

Due to increased competition, the argument is that people are now feeling demotivated by all the conspicuous consumption that they see online. It is simply too difficult to compete. The Gini coefficient is too high.

So why not just spent more time on leisure?

One potential policy implication is that raising the minimum wage wouldn’t be enough to spur increased labor force participation. Labor isn’t responding in the same way to wage increases. There would need to be a much more significant increase in income for that to happen – hence the “kinky labor supply curve.”

One view of the status quo is that media companies are aggregating human attention and selling it at a discount–far below minimum wage–to advertisers in a massive arbitrage on human capital. So, the state could set the price of an hour of human attention at the minimum wage rate, and charge media companies 12% (the federal income tax rate on minimum wage) of that wage rate for each hour of human attention they consume.

One possible solution is an attention tax. But their takeaway is that this lost productivity will more than likely be made up for with technology, which could ultimately translate into something we are already seeing: increased inequality.

Check out the essay here. It’s an interesting read.

Earlier this week I wrote a post called: The pull from services to products. And in it I made mention of the fact that part of what’s driving this pull towards products is that the marginal cost of servicing additional users or customers is almost nothing in a world of internet services and products.

Well the reality is that this phenomenon is driving a hell of a lot more. It could – and probably will – fundamentally change almost all aspects of the economy.

I know that sounds like a pretty audacious statement, but if you watch the following 10 minute talk by Albert Wenger (Union Square Ventures) you might start to feel the same way. He outlines 5 changes being driven by the fact that in the digital world, marginal cost = 0. The impacts go well beyond tech, capturing sectors such as transportation and industrial real estate.

[youtube https://www.youtube.com/watch?v=sVEtTzlqsoE?rel=0]

If you can’t see the video, click here.

I was watching this talk with Albert Wenger of Union Square Ventures last night. He was recently in Toronto for a Wattpad board meeting (USV is an investor).

It’s an interesting discussion that touches on education, healthcare, Canada’s tech ecosystem, as well as a bunch of other things. But one point that Albert made that I particularly like is the comparison between industrial and internet scale.

In both cases, it’s all about growth and scale. The bigger a firm can get, the better.

But with industrial production, scale is all about driving down the marginal cost. This is also known as economies of scale. As firms increase in size, efficiencies are found that allow the unit of production to drop in price. This, in turn, creates defensibility, because smaller firms simply can’t compete in the market.

With internet platforms the situation is different. Sure, there are still economies due to scale, but their competitive advantage is often derived from the fact that, on the margin, every new user increases the value for every other user on the network. This is called a network effect.

A perfect example of this is Facebook. People use Facebook because all of their friends are there. And as more and more friends join, it becomes increasingly more valuable. Without friends, a social network has little value. This make starting one fairly difficult. However once started, network effects are incredibly difficult to dismantle. This is their defensibility.

Another network effect example that Albert mentions is search (i.e. Google). This one isn’t so obvious. It may not seem like there are network effects with search, but there are. As a search user, you enter a query and then select from a list of results. In doing so you’re actually helping the search engine figure out what the best and most relevant results are for the keyword(s) you just entered. Again, in the end, everybody benefits.

I found this interesting because, in the case of internet platforms, scale is directly related to value proposition. The bigger something gets, the more useful it becomes. Now, you could maybe argue that the same is true for industrial production, but it’s a bit more tenuous. The direct link is cost.