James Joyner points to a chart showing the increasing disconnect between employee productivity and employee compensation and asks what happened in 1972, when the different trajectories were set. The leading candidates are automation and trade.
That makes sense, at least to a degree. When a company invests large amounts of money on capital and the result is that employees are more productive, who deserves the dividends? There are arguments that since such things are out of the control of the employee that they shouldn’t suffer for it, but the most obvious candidate would seem to be the employer that took the risk, bought to capital, and proceeded from there. Which leaves workers in a rather uncomfortable place.
Several years ago, when I was working at Falstaff, I looked at the tools we were using for our job (XML programming) and determined that they could be a lot better. A coworker later took control of the project when I got promoted out of the department. The end results were amazing. Our department productivity increased 86% over the course of a year, per-employee productivity increasing 300%. Training times collapsed from roughly 10 weeks to under four. Once they got wind of our new toolset, the company’s internal tools department threw a fit because they were supposed to be making such tools and not us. They complained all the way up to the COO.
The COO had up to that point been only vaguely aware of how well our division had been doing. Just aware enough that, when there were massive layoffs, they determined that our department could take a huge portion of the hit since we were keeping our head well above water. Internal Tools explained to him that it was their job to create tools and we can’t have other departments doing such things willy-nilly. Our director explained that we’d put in four requests for better tools (with specific recommendations), hadn’t heard anything, and had become tired of waiting. Besides, look at the results. Whatever time we “wasted” outside our job description had been made up for and then some.
The COO ended up creating a “Cash Reward for Ingenuity” and immediately gave my coworker and I said reward. An email went out celebrating our contribution and we got a mention at the next corporate meeting. Oh, and he decided that going forward, new XML programmers would get a 10% pay cut, seeing as how their job had just gotten so much easier. No longer could incoming programmers command the lofty wage of $10/hr, as there was even more money to be saved.
The thing that hurt about that last part is that, from a short-sighted perspective, there was actually some logic to it. Incoming programmers didn’t need as thorough a knowledge of the language anymore. We could hire the prototypical drop-out and they could do the job in a satisfactory fashion. The worst programmers in the department were now outperforming what the best performers were doing two years ago (though, of course, the best were still outperforming the worst). Such expertise was simply less necessary than before.
In the end, I still vehemently disagreed with the decision. By my reckoning, they had failed to understand the value of a good employee. Starting people out lower, identifying the talent, and giving those with talent a big raise would have been okay, too. Performance-based raises, however, were anathema. What you made starting out more-or-less determined your pay trajectory for the next decade (most years we didn’t even get a C-O-L increase, and a lot of promotions didn’t actually come with pay increases). Yet when such short-sightedness becomes common enough, it becomes conventional wisdom.
I don’t know how projectable this story is into the economy-at-large, but I do think that there is a tradeoff mentally between how much an employer invests in capital and how valuable they see their human capital as being. The less reliant employers are on an individual’s capacity and the more leverage an employer has over the individual, in real terms but I think more importantly in psychological terms.
This all gives me great concern for the future. I’m not worried about 40% unemployment as everything gets automated (or sent overseas). Morelike, I’m worried about how the desperation for work will give all but those with the most timely and necessary skills absolutely no leverage. I’m mostly worried because there doesn’t seem to be a clean solution to this. I don’t know how we could legislate this away. We can move money around, but that has its limitations. With it simply come down to mass public employment?
This does sort of put a big hole in the rising tides lifts all boats idea. When the interests and prosperity of the owners and the workers diverge like this it is a recipe for problems. Given our gov has highly favored the rich folk over the last few decades its not a surprise there has been little push to do something about this. Of course what to do about it is an issue. I would the decrease in union membership has added a bit to this divergence allthough certainly not the biggest part.
This problem seems to go right to the heart of how to make our capitalist society work. If it only works well for a few then its not going to work in the long term. And no i don’t consider cheap stuff from walmart and all the nifty tech we have a workable trade off for this divergance.
> By my reckoning, they had failed to understand
> the value of a good employee.
Well, yes.
They have also massively over-estimated the value of the technology.
“You installed this thing that made my job 1000% easier! Cool, we’ll lay you off!”
(five years pass)
“Man, our competitors are killing us, and the customers who are leaving says it’s because their tools are a hundred times better than ours! How the hell did that happen!?!?!”
Technology don’t stand still, people. What works awesomely today is tomorrow’s trash-bin code.
(you would think a COO would be able to grok a NPV vs. FV analysis, but it’s probably likely the geeks didn’t know to make one)
BUT in those five years their labor costs were reduced, their company was more profitable — on paper — and their stock rose. Or if private, their bonuses did. Because they cut costs! Raised productivity!
The original architects have generally long fled, well paid, by the time the chickens come home to roost.
long-term thinking isn’t CEO thinking.
One of the things I noticed with Circuit City is how pleased Corporate was when they really cut costs by laying off all of the more expensive employees and replacing them with less expensive employees.
Sadly, the more expensive employees were the ones with institutional knowledge and independent interest in the electronics that were being sold. The less expensive employees were also the less experienced… and the store turned from a geek haven into a place where teenagers would read off the card in front of the item in question to explain the difference between, say, two televisions.
Ten months out of the year, Circuit City is empty now. Two months out of the year, it’s “Halloween Central”.
Yeah, that was one for the ages, wasn’t it? It was so frustrating to have Best Buy on the one hand and Circuit City on the other. Neither were companies I could feel good about patronaging.
I’m sure someone could tell me Fry’s is just as evil as the other two, but if they are, they are at least less transparent about it.
Fry’s has never had the pretense (or practice) of hiring people who know stuff about what they’re selling.
They’re there to unlock the cabinet or get something down off the top shelf.
Heh. The COO did actually leave not long thereafter. It really didn’t matter by that point, though. The company was a dinghy headed for a hurricane. Demolished by factors more-or-less beyond its control. It’s still around, but as a shell of its former self.
Did they at least have free beer in the workroom?
Mormons. So no. Not that any non-Mormon employer I’ve worked for had them. They did have a soft drink fountain downstairs. That was bad for my waistline, but a good introduction to how nuanced their views on caffeinated soft drinks are.
(This is the employer I’ve mentioned that fired our sole remaining legal counsel for being gay. That wasn’t the COO, though. That was the other side of management. The side that wanted to fire my colleague for the bad hairstyle.)
I didn’t realize Falstaff was a Mormon beer.
I remember seeing a banner in Illinois, the kind that spreads from one side of the street to the other tied to the streetlamps.
There was the local Catholic place (St. Hoodat, or something) that was having a summer festival.
It was sponsored by Stag and Miller Lite.
Pro-choice Catholics apparently.
A neon Falstaff sign still hanging in a bar not far from there.
long-term thinking isn’t CEO thinking.
Eh, be careful about generalizing from anecdotes. Read Good to Great, and you’ll see that there are CEOs who are great at long term thinking. The difference is they tend not to make the news precisely because their companies don’t crash and burn. If it don’t bleed, it don’t lead, eh?
Well, to be fair, they didn’t fire us* or cut our pay. It was just for people coming in. We tried to explain “You know who is likely to invent the next great tool? That woman we’re talking to with the blockbuster resume and almost a master’s degree in comp-sci that we’re about to have to sell on taking the job for $9/hr.”
Then, wouldn’t you know, she took the job at $9/hr. We were glad to have her, but she undercut our argument by taking the job.
* – Well, they almost fired him. Not because he was making so much money or had unnecessary skills, but because he had a haircut the CEO did not approve of. The CEO basically went to the COO and told him to tell our director to fire the guy with that hair. Fortunately, the director worked it out so that the guy would just cut his hair, instead of losing his job. In most tales of working there, the COO and the MBA-types were the good guys in the battle between the MBA-wing and LDS-wing.
Generally speaking, consumers capture the benefits of automation. The first firm to automate will see a temporary increase in profits because they have an edge over the competition, but then competitors have to follow suit just to stay in business. Once that happens, the first mover no longer has an edge, and their profits return to the long-run average.
Which is why, to be successful, you need to keep innovating to stay in front of the curve. Hiring the cheapest people you can find is not a recipe for that.
What happened in 1972? Sheesh… what didn’t happen in 1972? In addition to the divergence between productivity and wages we have the following:
1. The Official U.S. Annual Inflation Rate, which had held stable at about 2.5% from the end of WWII until… oh, about 1970ish or so, went a bit wobbly for a decade and then settled into a new normal of about 4.3%.
2. This is the same point at which the sectoral inflation rates started to seriously and permanently diverge as well. The CPI for professional services (medical, legal, financial, etc.) all started rising at about twice the rate of the official overall CPI, while the CPI for manufactured goods that you would typically buy at Wal-Mart for example, stayed level and in many cases went negative.
3. The balance of trade, which until the abandonment of Bretton Woods, was… well, balanced, went permanently into deficit beginning in 1975 and continuing to this day.
The problem with looking at something like the productivity/wage divergence in isolation is that you can come up with any number of plausible explanations with little reason to differentiate between them. But when you look at all the major economic indicators and consider how they may interact, the balance of the evidence points indisputably to the Nixon Shock and subsequent trade/fiscal policies as the root cause.
Being a knowledge worker these days seems to be an exercise in destroying your own job. A big part of my job function is to streamline all of our processes. That means they give me a report that takes five hours to compile and I trim it down to two. Do this enough times without new business coming in and you find yourself dragging your feet on the next project.