Capital Is Cheap And Labor Is Expensive

I was on an airplane for the first time for business in a while and when I woke up from my nap I found my self staring at CNBC on the DirecTV seat back display. I never watch CNBC so I was attracted to the talking heads, who were silent since I didn’t have earphones in. I kept thinking I was watching ESPN with all the sports metaphors, blinking lights, constantly changing headlines, and tightly coifed and good looking men talking at me in rapid fire.

Between a headline about Carly Fiorina exploring a run for president and Zebra Technologies equipping all NFL players with tracking devices I noticed one about companies who were raising prices to inflation proof their business. At least, that’s what I thought it said since it flashed up there quickly between a headline about “Steel is on Fire” and then a video of Warren Buffett walking around without a headline so I had no idea why they were showing him.

The inflation proofing headline stuck in my head. We’ve had a very long period of low to no inflation, at least based on the way the government calculates it. While my cynicism around government math and how inflation is calculated is substantial, there isn’t much question that since 2008 capital has been extremely cheap. Fred Wilson wrote a great post titled The Bubble Question a while ago where his punch line was:

It is the combination of these two factors, which are really just one factor (cheap money/low rates), that is the root cause of the valuation environment we are in. And the answer to when/if it will end comes down to when/if the global economy starts growing more rapidly and sucking up the excess liquidity and policy makers start tightening up the easy money regime. I have no idea when and if that will happen. But until it does, I believe we will continue to see eye popping EBITDA multiples for high growth tech companies. And those tech companies with eye popping EBITDA multiples will use their highly valued stock to purchase other high growth tech business and strategic assets at eye popping valuations. It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

But I think cheap capital is only half of the equation. The other half is ever increasing labor costs across all aspects of the wage chain. When I was in business school in the 1980s, we talked a lot about the productivity paradox. The premise was that computers and automation would drastically improve productivity, making labor less important as tasks were automated, resulting in lower cost of labor.

As the technology industry rapidly evolved, the notion of non-productivity kept coming up. Nicolas Carr’s HBR Article “IT Doesn’t Matter” was probably the capstone piece around this and how companies could take advantage of the commoditization of IT, rather than how IT was a transformative input into companies and societies.

Suddenly, in 2010, technology was disrupting everything and the technology industry was booming. By 2013 everyone was talking about a bubble, even though the companies being created this time around were substantial. Once again, wages for IT employees and computer scientist were skyrocketing and suddenly coding schools were popping up everywhere, to the point that people are now saying that Computer Programming Is a Trade; Let’s Act Like It.

Capital remains incredibly cheap, so it’s flowing into wages. But that’s only at the high end of the market around technology jobs. At the other end of the spectrum, we have the famed jobless recovery with the elimination of massive numbers of jobs that previously existed, especially in industrial and Fortune 5000 companies. While this is happening, we have an entirely new class of entrepreneurs, or self-employed, being created by companies like Uber.

Yeah – this shit is super complicated and it plays out over a long period of time. In fact, it might only be really possible to understand what is happening in hindsight. But the combination of cheap capital and expensive labor has created a very powerful economic dynamic which right now is driving massive innovation across virtually every industry sector around the world.

We know that extremely low cost of capital will not last forever. We know that eventually there will be real inflation again. And we know that wages can’t increase endlessly. I wonder what happens to the allocation of capital, entrepreneurship, and the impact on society when capital gets expensive again?

  • My favorite post of yours to date.

    When you look outside of tech, this will hit the wall even faster.

    The food business especially, based on subsistence paid, talented people laboring to produce premium products. From juice to pies, this is true. How the economy for artisanal goods shakes out when we start to pay livable wages is a scenario that has yet to be played out.

    • what’s a livable wage? My point being it’s different for everyone. Normative economic decision making instead of positive economic decision making.

      • If you are sub 35, 1-2 kids, you and your spouse work, you live within 100 miles of NY, have a car, make less than $15 a hour, you are in pain when you get a flat tire.

        • If that was me, I’d move to North Dakota. My ancestors moved from the south to the north for jobs post WW2.

          • I understand your point of course but the bigger question, one I’m not doing a good job articulating is that if everyone moved to North Dakota, some 50K restaurants and bars in the 5 boroughs would of course all have to close, of increase the cost till no one would eat or drink there.

            That’s the gap I see.

          • NYC is a world city. NoDak couldn’t support all 5 boroughs! Also, if enough people moved out of NYC, supply and demand would change and more people would move in if there was opportunity. Sort of like gentrification.

          • I’m addressing this now with Lianna’s company doing a raise.

            How do you bring the cost of the labor for one bottle of premium blended juice from x to x/4?

            Technology and workflow. Capital to buy big honking machines and a line that require both fewer qualified people and more unskilled people.

            Interesting problem.

    • RBC

      On behalf of Mr. Wilson “Yesssssssssssssssss”

    • It’s going to be a groovy and messy one. I’m already seeing this in my food investing as an angel investor. And, all you need to do is wander through a Whole Foods and compare it to what our childhood Safeway looked like to understand how rapidly things are changing now in the mass market segment.

  • Labor is expensive and not enough quality labor (which is another challenge to tackle).


      I was a programmer for 15 years. I no longer write production code. But on occasion I “check” the market by talking with people who say they are looking for a programmer. They don’t pay more now! In fact they are wanting to pay less than what they paid just 10 years ago. Also I find many companies thinking they are a tech company when they are not. I think their is a disconnect somewhere. The last thing people seem to understand is how to know if someone is a *quality* developer.

      • This is not my experience at all. In 1987 when I graduated MIT, a computer science grad was delighted with $30k / year. Today it’s $120k+ / year. Based on inflation / CPI ( the $30k in 1987 looks like about $63k in 2014 dollars. So an MIT grad CS major has seen his wage rate at least double.

        • Rick

          I’m not seeing it Brad and Philip. I really would like to talk with some people paying $120K/yr for programmers. Can you guys put me in contact with any? I won’t even tell any of the unemployed I know who you connected me with.

          • Rick

            BTW you guys can’t use recruiter numbers or other things. This has to be real life people paying $120K for programmers.

          • Rick

            I think we were talking about programmers. Not software engineers or architects. Which in my mind is a major difference. A programmer receives specs then codes accordingly. An engineer or architect might be able to code but they are taking on more complex problems and much more responsibility. It can sometimes take three programmers to implement the output from one engineer. That is if you’re using hand coding methods.
            I really was wanting to make connections with companies paying $120K/yr for programmers. It wasn’t about proving you guys wrong.

          • I don’t distinguish the same way you do between programmers and software engineers.

      • Wages for good programmers have doubled in the last 10 years.

  • “Ever increasing labor costs across all aspects of the wage chain?” I disagree.

    The Bureau of Labor Statistics report of median usual weekly earnings of full-time wage and salary workers is a pretty good picture of the entire wage chain and it shows median weekly earnings of $332 1982-1984 dollars in Q4 2005, which is identical to the $330 1982-1984 dollars in Q2 2014. 0% increase in 9 1/2 years, even with the addition of 1.7MM workers during the period.

    Even with minimal inflation, labor across ALL aspects of the wage chain has become cheaper in the last 9 1/2 years.

    Now, have software engineers become more expensive? While I don’t know, I’d guess yes. Have CEOs become more expensive? Yes.

    The BLS report can be found here:

    • Don’t disagree labor mkt flat-but stats corrupted by the 2008 fin crisis. So much talent lost their jobs in lots of different industries. Supply and demand curves are still unbalanced.

      • Agreed that the financial crisis had an impact and has distorted the supply and demand curves. But what is interesting is that BLS wages went UP (although not by much) in ’08 and ’09, although participation plummeted. Here’s the Q4 weekly wage numbers in 82-84 constant dollars, and workers in millions

        2005 $332 104.6MM
        2006 $337 106.8MM
        2007 $332 108.2MM
        2008 $340 105.6MM <–Negative worker growth
        2009 $344 98.6MM <–Continued loss of workers
        2010 $341 99.9MM
        2011 $335 101.3MM
        2012 $334 103.6MM <–Jobs recovery taking hold
        2013 $334 104.6MM
        2014* $330 106.3MM*
        * Q2
        Through Q2, we still haven't recovered the worker levels we saw in 2007, nor wages in constant dollars. I imagine some of the missing workers are now Uber drivers or Task Rabbits, but did we do them any favors?

  • The “job” and “work” arrangements are what will most be affected by technology so it’s more difficult to actually measure with the traditional methods, and of course the government will catch up by 2025!

    If I’m hiring people as employees in the tech world there is a definite, significant inflation as you mention. However, if I’m using independent contractors I can actually get things done more efficiently and cheaper. Key is to know what I’m doing, need and have the experience to plan and manage the work remotely – which people are getting much better at every day.

    As for the non-tech related jobs the mobile apps and service marketplaces are creating a new universe of opportunities for people that can do what they enjoy, in their selected times and actually earn more. This is the most exciting part since it’s just beginning to take shape and flourish, (also called the “bottom-up economy” by Homebrew and “on-demand economy” by Sherpa.)

    • The bottom up economy is exciting, and all you have to do is talk to an Uber driver in some cities to understand the enthusiasm. But it’s still very chaotic and in some cases (e.g. Kansas City) being heavily subsidized. It’ll see how things work when the subsidies stop.

      Geography is becoming complicated again. The Tom Friedman “world is flat” hypothesis is starting to take on a very different meaning than I think he intended.

  • Brad –

    I am curious… what is the market like for engineer in Boulder these days?

    • Tight. It’s always tight here. There are many great engineers, but they tend to be loyal so there isn’t that much regular movement. Fortunately, it’s very easy to recruit here (to expand the pool) and CU Boulder belts out a steady stream of really smart recent grads every year.

  • KatherineF

    The inflation calculation is complicated and we will see where it takes us. It is interesting to wonder when the government will rethink calculations, especially as the economy morphs into “more people work from home” or “as contractors” or the increasing costs of healthcare. More employers are transferring the cost of healthcare to their employees and some have seen up to a 30% increase in this expense.

    • One of the unintended consequences of Obamacare (the transfer of health care costs…)

  • Human capital costs are always the most expensive inputs to production. As an old interest rate trader I was pretty sensitive to inflation. If I am sniffing for inflation there are some sources I check. First is the PCE Trimmed mean price index. Next thing I look at is the numbers inside of monthly unemployment numbers. (hourly wage increases, hours worked, overtime hours worked) If the hourly workweek starts to trend strongly upward with more overtime being put in, good chance that we will start to see an expansionary economy which could be inflationary. Of course, if companies retool and use mechanical capital that’s not a great indicator.

    Next place you try to gauge is the velocity of money. Is money that the Fed creates turning over? Bank loans and the kinds of credit expansion are the best clue there.

    Currently, we are not getting money velocity. Trimmed mean PCE is tame. Hours worked and wages are not under upward pressure. Hence, no inflation.

    We can argue over current fiscal/fed/regulatory policy, which I don’t think is very optimal for growth. I think the kindling is there for rampant inflation-and the Fed is always behind the curve because by the time they see it, inflation has left the station.

    With capital being cheap-and risk/reward preferences have changed with 0% interest rates, it is incumbent on entrepreneurs to be judicious and raise capital only when they have to. Cheap capital creates excess.

    • The punch line “cheap capital creates excess” is an important one. It’s like my post on the Amazon Scorpion Problem – it’s in our nature to be less efficient with capital when it is cheap!

  • If companies benefitting from cheap money actually bring in sustainable revenue over time (unlike counterparts of the the dot com boom and bust), I don’t think we can consider this a bubble (although I do believe that bubbles can last over four years). The “bubble” is not in the valuation, but the value. As Fred points out, with Treasury securities offering decent rates expiring, it makes sense that investors are looking for alternatives in VC and direct investments. This is especially true in the PE / fixed income world. It makes sense that this impacts valuations.

    While your post conjures up images in my mind of pre -‘ 08 Landlords taking equity out of over-valued real estate to buy (and sometimes flip) other properties… the key differences in this analogy are that the inflated valuations in real estate were driven by demand and skewed by two factors: 1) people using both negative amortization adjustable loans (deferred interest) which minimized payments, but tacked interest on to the principle owed (much like capitalization of deferred student loans, but that’s another topic) and 2) No-doc, stated income loan apps granting these neg-ams to people who were unlikely to afford adjusted payments (but were sold the idea of their multiple cash-flowing properties increasing their income). In reality, there was nothing tangible or sustainable about values in that case.

    Regarding wages, that, too, is a matter of supply and demand. I’d wager that, as we begin grooming more coders, wages will drop, despite increasing productivity, as per the trend nationally ( All the more reason for us to return to our nation’s entrepreneurial roots.

    In my esteem, your cynicism on government math is understandable. Overall, economic theory is just that – #theory. We’ll see how it plays out…

  • Adocracy

    Because of the consequent increase in the cost of labor, then the “cheap” money is still eventually funding us entrepreneurs to “buy” the same level of labor talent, no? We’re definitely seeing inflation in basic living costs (i.e. Rents) in the Bay Area due to this wage glut. Even though it’s Rents, which is more flexible in the short term, it’s still Real Estate, which is a relatively inelastic reservoir of value, which is its own problem. We’re seeing house prices go for sometimes +$1 million over asking (30-50% over list), which is a result of local wages plus a huge influx of Chinese dollars. This kind of dynamic almost demands higher valuations in order to locate a startup in the Bay Area and pay living wages for even non-technical jobs. It’s almost a damned if you do, damned if you don’t situation. And I can see why investors might think money is cheap right now, but from the startup side of the coin, it’s not like those valuations are resulting in massive immediately recognized gains.


      “…it’s not like those valuations are resulting in massive immediately recognized gains…”
      It’s all a game of playing with numbers. You still need to acquire resources to create things. You still need to get out your MVP. You still need to sell, sell, sell !!!
      Take some from here… Put it there. Take some from there… Put it here. That’s why FU money is so good. It lets a creator do some serious creating while helping to prevent running into the “resources road block.”

    • There are pockets of the US where this is a massive supply/demand imbalance in things like housing. Whenever this happens, you have extreme value increase that is not grounded in long term structure. As long as the imbalance exists, there is no issue, but once it’s normalizes, you have a big, or possibly bigger issue the other direction.

      • Adocracy

        Agreed – which is why long term, maybe we should encourage better ways to have distributed teams collaborate on product, rather than VC’s encouraging same-room teams (as yet another method of risk reduction). Ultimately, supporting distributed teams might be a better capital allocation method by VC’s to help protect their future investments against upside increases in valuations due to pressures like wages, cost of living, etc. Especially in light of new management ideas like in The Alliance, where it’s more mutuality of interests, as opposed to long-term loyalty requirements. Do you think distributed teams will ever capture the VC market’s interest?

  • I like your headline and it applies 100% these days to developed countries where labor is indeed expensive. But the minute you cross over to countries where the GDP per capita is roughly under $10K/year, then the opposite is still true: capital is expensive and labor is cheap.


      Good things to know. Thanks.

    • Yup. I should have been clearly that I was focusing on the US.

    • RBC

      Surely those countries will be affected by the changes in developed markets too. The impact there seems equally difficult to predict.

  • I was speaking to my brother who spends the summer in Paris about this. There are four groups of labor in the U.S.:

    1. Labor that uses or makes technology to make things massively efficient. Think of the Expedia team, Uber Team, Google, Apple, etc
    2. Skilled Trade Labor: Plumber, Mechanic, etc.
    3. Labor that can get replaced by Group 1: Travel Agents, Secretaries, Store Clerks, etc
    4. Unskilled Labor

    The unfortunate fact is if you are in Group 3 or 4 right now are you are fucked.

    Group 1 is realizing how valuable they are. Think about it if you write an app that replaces 1,000 travel agents how much are you worth?? How about if you develop an app that makes getting a car super efficient for millions of people?? Same for making the logistics that mean you can import clothes from China. These wages have gone way up as these people realize how valuable the are.

    Group 2 services Group 1 and does just fine.

    But the majority of people are in Group 3 and Group 4. Now in many parts of the world like India what this means is you make absolutely nothing which means that Group 1 has a driver, maid, landscaper, etc, because they are so cheap. That has not been the case in the U.S. for the last century.

    So the question is what happens? I don’t have the answer to that one. Simply giving money from Group 1 to Group 3&4 doesn’t work. Making a high minimum wage seems like a good idea, but it will make Group 1 even more valuable to eliminate jobs. Going to a 32 hour work week was tried in France but seems to just make people lazy.

    I don’t know. Every chart I see shows that GDP per capita inflation adjusted has gone way up: The question is how is it distributed, and should we care? I do care because I like the middle class. I want to see somebody be able to work in a factory or service industry and make enough money to live reasonably for many reasons. That means they can buy things which keeps reinforcing the economy, and I like to be able to live with and amongst the middle class. .

    This is the question. Its not how to hate on rich people or build class warfare which our politicians like, but it is a really tough discussion. I’d like people smarter than me to honesty and earnestly debate, but I don’t see that happening either.

    • Rick

      I’m probably not smarter than you but… You’re putting people in groups without considering if they *should* be in those groups. Some people are stuck in a group where they are less effective because they can’t get the chance they need. There are people in the world with answers to our most important questions who are doing manual labor so those answers will not be uncovered and used. It’s all about opportunity! If everyone had the same opportunity then most inequalities would not exist. There would still be people who *want* to do things they are not most effective at. But in general it’s all about the fact that some don’t get the opportunity to give their best to the world!
      Many people say there is lots of opportunity. But a person who has an idea for making a car that gets 100+ MPG won’t be able to bring that car to market unless they can find the required funding.

      • The statement “If everyone had the same opportunity then most inequalities would not exist” is a really challenging philosophical one. Millions of pages have been written about this. Since, as humans, we have different genetics, different chemicals in our meat puppet, different backgrounds, different brain chemistry, and vastly different contexts, I think distilling it down to a statement like this doesn’t really work.

        • Rick

          What is equality if not available opportunity? I’m not saying we are all *the same*.
          “meat puppet” – What in the world is that?!

      • I am not debating whether people “should” be in certain groups I am observing what is.

        “If everyone had the same opportunity then most inequalities would not exist” I completely disagree. We all know people that came from nothing that were super successful and those that were given everything and were complete failures and they are not outliers. As soon as you start saying its not your fault that is where we get in trouble. No different than everybody is a winner.

        My only point is somehow those that are in Groups 3 & 4 should be able to live a decent life.

        • Rick

          “I completely disagree.”
          You’re not thinking carefully about that. If we all have the same opportunities most inequalities would not exist is quite true and correct. What you’re doing is getting the choices made mixed up with available opportunity.
          If we all have the same opportunity then we are all equal. Just think about it for a minute. If someone chooses not to take advantage of the opportunity that is OK. But what makes them equal to everyone else is that the opportunity is available to them.

    • The groups you delineate in 1..4 make a lot of sense to me. I’ve never thought about it that way but it’s a framework I will definitely use as I think about things.

    • Your groups are a good starting point but I’d argue again the groups 3/4 being “fucked”. This is similar to people saying local retail is dead in early 2000’s and now realizing that is not true and the online retailers trying to go physical.

      We making a lot of assumptions as to how software (or robots) will replicate the work and position of humans in the future. I would not count out unique human capabilities and replicate them to an app en masse. Yes software will help in convenience and speed but at the same time the more I use software the more I value some real human traits.

      • It not a question of if or when. You go look right now. If you took away all government aid programs, got rid of all unnecessary government employees, there would be vast swaths of people in this country that would not be able to eat, be housed, etc. I give you the percentage on food stamps, welfare, or disability for proof. I am not saying get rid of those programs I am saying if you did what would happen.

        • I wasn’t really talking about government employees or assistance. My point is regarding the assumption that technology will replace humans in groups 3 & 4. Bear’s said in the past that the machines have already won, even groups 1 and 2 can ultimately be eliminated by AI if you look out far enough.

          In the meantime apps and tech tools can be used by people to increase their income if informed and trained properly.

          • Rick

            I’ve generated 10’s of thousands of LOC. Eliminating the need for a programmer to type them in.

        • Rick

          “…there would be vast swaths of people in this country that would not be able to eat, be housed, etc.”
          It’s not that they would not be able to eat or housed. It’s that they would not take the initiative to do so for themselves.

    • These are great distinctions! I think it would be even more effective to expand Group 2 to be “Skilled Labor and Services” instead of only “Skilled Trade Labor”. That way it includes accountants, bookkeepers, attorneys, HR professionals, doctors, financial planners, agents in the entertainment industry, directors of nonprofits, all C-level staff, stock brokers, and many others.

      These people all fit the parameters for Group 2: They can’t be replaced by Group 1’s technology innovators, nor be replaced by unskilled overseas labor.

      Also, I think it’s actually a bit dangerous to say that “Group 2 services Group 1 and does just fine”. It’s more productive and accurate to say “Groups 1 and 2 service each other and do just fine”. I doubt there are any people Group 1 who don’t use the services of someone in Group 2 almost daily – and vice versa!

      The danger in saying it the first way, that “Group 2 services Group 1”, is that it unintentionally perpetuates a subtle but highly unproductive bias that Group 2’s service professionals are somehow less valuable to the world than Group 1’s technology innovators.

      I’m part of Group 2. I’m a bookkeeping and accounting professional who owns a small business that provides services to local, small businesses with under $2M annual revenue. We don’t serve startups (well, not any more at least – but that’s a different story for another day). I do, however, have 20+ years of personal experience working with startups, including those funded by VC’s, customers, and/or self-funded.

      I’ve seen this bias against (and within) Group 2’s service professionals inadvertently cause a lot of wasted time and money. Sometimes the Group 1 tech innovators don’t value the expertise of the professionals in Group 2 so they don’t put a lot of resources towards finding and cultivating it. Other times they couldn’t find someone among Group 2’s service professionals who could translate their knowledge in a way that was useful. Either way, I believe this bias wastes a lot of money and time when it isn’t identified and mitigated.

      The most successful tech businesses I’ve worked with have done a spectacular job bridging the gap between Group 1’s innovation and Group 2’s depth of expertise and more “analog” knowledge.

      I also believe that the most valuable individuals within Groups 1 and 2 are those who learn how to cross over and work effectively with members of the other Group, and then become ambassadors to translate the insights and knowledge back to their own professions.

      • All super valid and correct points. I appreciate your input, it helps refine my thinking. My idea was just that a rough idea until I started writing it down. That is why I like commenting. I have a hard time just coming up with original material but when presented with a thesis I like to return serve. I think you have done the same.

    • Dalki

      you forgot to talk about the people who really matters, the 1%.
      All the groups serve the 1%
      It’s not class war apologie but the simple brute reality of our world