Professors Get Long-Term Contracts. Why Not Average Workers?

(Bloomberg Opinion) -- Academia doesn’t pay that well. According to the American Physical Society, in 2013-14 a graduate with a doctorate in physics could expect to earn about $60,000 as a tenure-track professor, but about $90,000 in the private sector. Why the disparity? One reason is that being a professor is in many ways a nicer job than working for a company -- the hours are flexible, you don’t really have a boss, and you get to exchange ideas with other scholars and live in a pleasant campus setting.

But academia also has another big advantage -- the promise of tenure. Academic tenure offers a permanence and stability that has almost disappeared from the private sector. Although some people disdain that stability and instead relish the chance to hop from job to job, others value job security enough that they’re willing to take a lower salary in exchange.

An economist would naturally ask: Why don’t workers have a choice? In academia, labor contracts are set by the interaction of government and nonprofit employers and powerful labor unions, so perhaps it makes sense that their employment arrangements would be rigid and traditional. But in the private sector, especially in this de-unionized age, there are no such constraints -- there is nothing at all to stop employers from offering different types of labor contracts to different workers. So why don’t companies offer tenure-like options?

The idea of corporate tenure might seem silly. Companies can die at any time -- the average life span of a corporation in the Standard & Poor's 500 Index is less than 20 years. How can a company make a credible promise to retain workers if it might not even be around two decades later?

There are several ways. A company could promise that workers on long-term contracts would be the last to be let go in the event of layoffs. It could specify that they’d only be laid off if the company’s financial performance was worse than a certain benchmark. Perfect job security is never possible in the corporate world, but there could be contracts that offer more security than the at-will employment most American workers currently have. At very old companies in mature industries, like General Motors, long-term contracts would be a valuable promise. Long-term contracts are already common in the world of professional sports.

Some companies already effectively have this type of arrangement on an informal basis -- or at least, their workers probably think they do. In the 1980s and 1990s, a theory called implicit contract theory briefly gained credence among some economists. This was the idea that workers expect their companies to try not to fire them, and in exchange, companies expect some measure of loyalty, even though these obligations are never written down on paper. Though this sort of mutual understanding is now rare in the U.S., it’s still somewhat common in countries like Japan. Formal long-term contracts would merely bring these tacit expectations out in the open.

Why would a company want to offer long-term contracts? After all, that kind of arrangement would reduce its flexibility, sort of like a long-term pension obligation. The company would need something in return.

In exchange for a long-term contract, workers would presumably accept lower starting salaries -- like tenure-track professors, except perhaps even lower to account for companies’ greater volatility. Paying workers in promises instead of dollars would improve companies’ cash flow in the present at the expense of flexibility in the future. Workers could also give pledges of loyalty -- for example, a promise not to quit a job for a certain number of years, with some kind of financial penalty for quitting.

Long-term employees would probably occupy different roles at companies than at-will employees. They would be company men and company women in the old sense, learning the ins and outs of the corporate culture, helping to maintain continuity of vision and executing long-term plans. These contracts would naturally attract risk-averse individuals, but also workers who believed strongly enough in a company’s mission to dedicate many years of their career to one employer. With less fear of being fired, there’s a chance that some employees under long-term contract would feel free to take more risks than their counterparts who could be fired at a moment's notice.

Though American workers are famous for being bold, opportunistic risk-takers, the experience of the Great Recession may have made the millennial generation more cautious. Job-hopping among younger educated workers is actually slightly less common than it was for their Generation X predecessors.

Some surveys have also found that millennials are especially concerned about job security and stability.

Both increased job tenure and a greater desire for stability are probably artifacts of the Great Recession. Workers clung to their jobs for dear life when jobs were scarce; assuming another big recession doesn’t occur, Millennials may eventually resume job-hopping. But more importantly, every generation contains some people who would prefer to be company loyalists if given the chance -- why not accommodate them? Economists might not have a good answer as yet. Some models say companies should already be offering long-term contracts, leaving open the question of why this doesn’t happen.

In any case, companies might try experimenting with long-term contracts. If risk-averse and loyal employees end up performing better, the innovation could spread. It might even help some companies be less short-termist. In any case, in a world where some workers crave stability more than cash, it makes sense to give it to them.                                                                                                                              

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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