Tech

Wages, Employment, and Productivity

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I think President Trump is quite sincere about his oft-stated desire to drive up the wages of low-income workers…especially young and non-college workers…and he does seem to be having some success at this quest.  It has struck me for a while that while this is a very good thing from the standpoint of the overall society, it is also likely to pressure business profit margins, with possible consequences for the stock market as well as for Fed policy.

Yesterday the WSJ noted that “wages for 20- to 24-year olds are increasing twice as fast as for other workers…Overall job satisfaction in 2018 was the highest since 1994.”  At the same time, “90% of blue-collar businesses report operating with unfilled positions, and 29% say this has made them reduce output or turn down business.  Rising wages together with sluggish productivity growth are crimping corporate profits.  Between the fourth quarter of 2014 and the second quarter of 2019, profits for nonfinancial corporations  declined 17% and 46% for manufacturers.   The article quotes the Conference Board:  “The US will not be able to maintain its current standard of living unless the US government acts to significantly increase immigration, improve labor force participation, and, together with employees, raise labor productivity growth.”  To which the WSJ writer adds:  “Maybe the only short-term fix is to increase legal immigration–unless Americans want to see their living standards decline and more jobs exported.”

Higher wages do of course drive productivity improvement…the US has been a pioneer in the mechanization of work in large part because it has been a high-wage country, and that mechanization has helped to enable further wage increases.  This doesn’t always require any new inventions:  there are always productivity tools available that will make sense to a business that is paying $25/hour for labor but would not make sense to one paying $15/hour.  The process isn’t instantaneous, though.

Concerning immigration as a solution to labor shortages: commentators sometimes lose sight of the fact that GDP per capita matters for broad-based prosperity, not just absolute GDP.  And the only way to increase GDP per capita is through productivity improvements and higher labor force participation rates.  Increasing the raw number of workers doesn’t do this.

The Conference Board statement appears to put a lot of emphasis on things that the government should do, and the WSJ emphasizes more (legal) immigration.  Some increases in legal immigration may well be a good idea…as would increases in American fertility rates…but the main issues, I think, are productivity and the labor force participation rate.  The actual productivity numbers don’t reflect all the talk about (and even the realities of) robotics and AI.  Maybe this is largely just a matter of implementation lags, maybe it reflects increasing bureaucratization and ‘compliance’ costs throughout our economy.

My concern is that margin pressure may lead (in conjunction with other factors, like already-high valuations) to a sharp stock-market decline, which could have electoral implications.  Such decline might also lead to many deferrals of productivity-improving investments.  Alternatively, Fed concerns about rising wage rates as a possible signal of incipient inflation could lead the central bank to increase interest rates excessively as a preventative.

And any electoral result which substantially increases Democratic party power could lead to massive upsurges in legal and illegal immigration, with consequent wage pressures, demoralizing many workers who are now on an positive track and deferring the need for productivity investments.  Any attempt to deal with such wage pressures by establishing high Federal-level minimum wages would add much rigidity to the systems, creating problems of many kinds.

Discuss, if you feel so inclined.

Book Review: The Good Jobs Strategy, by Zeynep Ton

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Retail businesses are associated with low pay and high employee turnover–especially in the case of those retailers who offer low prices–and the same is largely true of customer-service call centers.  It has been generally assumed that low wages in these operations are a necessary concomitant of low prices for consumers, and that only businesses serving a premium-price customer base can afford to pay high wages.

Comes now Zeynep Ton, arguing that the low-wage strategy is not the only one available to retailers and other customer-service businesses that need to offer low prices, and that indeed often–usually–it is not the best strategy.  She draws connections between the pay and hiring strategy of a business and the operational basis on which it is managed.  To wit:

Low pay and high turnover implies minimal employee training, because you can’t afford extensive training for employees who are going to leave in a matter of months.  Minimal training implies less operational flexibility, because employees will not be cross-trained for other functions.  An environment of high turnover and not-well-trained employees implies that employee functions must be strictly proceduralized, often to the point of excessive rigidity.  And the lack of flexibility driven by minimal training and experience makes it harder to build in appropriate staffing “slack” to handle peak demand situations.  The lack of slack and flexibility leads to endless emergency rescheduling of personnel, reducing morale and further increasing turnover.   (She provides some vivid examples of what this endless and short-notice rescheduling can mean to the personal lives of employees.)

On the opposite site, higher pay can contribute to lower turnover, making more-extensive training economically viable.   Better-trained employees can more easily perform multiple functions, so that absences or staffing imbalances have a less-harmful effect.   Better-trained and more highly-motivated employees don’t need micromanagement, either by human managers or by systems and procedures.

Ho, hum, you say, what’s new?…people, especially consultants and professors, have been writing for years about why employees should be treated well and how it pays off to do so.   How is this book different from a million of others?

The Good Jobs Strategy is, in my view, something quite different from the typical “just treat ’em right” sort of soft, warm, and cuddly advice often found in books and LinkedIn posts.   The author ties the feasibility of the high-pay / high-expectations strategy to effective operational management, with the right systems, procedures, and incentives to enable such operational excellence.

An interesting example the author mentions is that of Home Depot. She credits much of the chain’s early success to its high-quality associates–“knowledgeable and helpful and willing to do whatever it took to help you, even if that meant explaining to you that you didn’t actually need what you came to buy.”   The associates tended to be former plumbers, electricians, etc–and they were employed full-time.   HD grew very rapidly–“customers were driving two hours to go to its stores and, once they experienced the service and great prices, they kept coming back”

But, with the growth came problems.   There was a lack of discipline in the stores, in how the stores communicated with headquarters, how the company selected its products, and how it communicated with suppliers.   “In 2000, bills and invoices were still processed by hand, and headquarters communicated to 1134 stores via fax because there was no companywide email.”   In 2008, two senior IT executives (newly hired from Walmart) concluded that Home Depot’s IT systems were about where Walmart’s had been in 1991.   In summary, HD had become “a classic example of a service company that did not fully appreciate the role of operations in making customers and investors happy…Operations are all those factory-like activities that a business has to carry out in order to provide whatever it is that it sells. ..In a retail store, for example, operations involves things like having the right product in the right place, having a fast checkout, and having a clean store.” Zeynep Ton says that internal measurement systems often don’t focus on such matters–at one retailer she worked with, “Twenty percent of the (store manager’s) score had to do with the store’s customer interactions.” In this chain, “mystery shoppers” would score the store on things like how the employees greeted customers and made eye contact.   But, she notes, “kindness or friendliness won’t make up for operational incompetence. ..It is hard for your dry cleaner to make you happy if you can’t wear your favorite suit to an important interview because they didn’t get it cleaned on time.”

When Robert Nardelli became HD’s CEO in 2000, the systems and procedures problems were rapidly addressed.   Gross margins and net profit margins increased substantially.

BUT, “the culture of cost-cutting was soon felt at the local level, where store employees, who were once at the center of Home Depot’s success and at the top of Home Depot’s inverted pyramid, became a cost to be minimized.”   The company started hiring part-timers, in the name of both staffing flexibility and cost…the knowledge level of the typical employee encountered by a customer fell noticeably.   By 2005, HD was ranked lower in customer satisfaction than was K-mart.   Same-store sales growth fell and even became negative.   Nardelli left the company in 2007.

Zeynep Ton summarizes:   Operational designs don’t execute themselves.   They depend on having the right people, and having those people motivated to do the right things.

The book discusses the actual complexity that exists in many seemingly-simple businesses, and the fact that individual employee decisions do make a difference. “If you are a supermarket employee shelving a case of toothpaste and all but two of the tubes fit on the shelf, should you take the two extras back to storage or would it be better to squeeze them onto the the shelf, even if it doesn’t look so good?   If a tomato looks just a little soft, should you take it to the back room now or wait until it looks worse?   Maybe it will be just fine for a customer who wants to make tomato sauce…it is hard, if not impossible, to make such work so simple and simple and standardized that anyone can do it without exercising judgment.   Things happen in real time at retail stores, and employees have to learn to react.”

(It is incredibly refreshing to see a B-school professor thinking and writing at this level of detail and specificity)

One interesting company discussed in the book is QuikTrip, a large chain of convenience stores combined with gas stations.   The company is very selective in its hiring….the author compares getting hired there with the difficulty of getting into an Ivy League college.   In the Atlanta area, 90% of applicants don’t even quality for an interview, and of those who do, only one out of five is selected.   Turnover rate among QuikTrip employees is only 13%, far lower than the industry as a whole.   The chain emphasizes speed and flexibility…”QuikTrip’s fast checkout is a site to behold.   One thing that makes it so fast is that any employee can use any register at any time without making the customer wait.   If you regularly shop at a supermarket, you know it’s no fun waiting for the cashier do a changeover.   The other thing that makes QuikTrip so fast is that employees have been trained to ring up three customer per minute.”   She says that the employees can even calculate change in their heads!

Other examples discussed include Costco, Trader Joe’s, In-N-Out Burger, and the Spanish supermarket chain Mercadona.

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Shovel That Code

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…into that server!

Joe Biden gave coal miners facing possible unemployment some advice:   learn to code.

In reality, of course, programming/coding is a skill that can exist on multiple levels.   Someone writing a simple spreadsheet model for some kind of repetitive tracking problem is working at a different level from someone writing a well-defined module within a large system for a bank, who is in turn working at a different level from someone writing interrupt-level hardware drivers for an operating system, or for someone creating the idea and user interface, as well as the code, for a new consumer-facing product.   Some of these tasks will usually pay less than what a skilled coal miner is paid, some of them will pay considerably more.

And also, programming is not an infinite reservoir of job demand. Much work that previously required considerable high-skill programming has now been largely automated by software tools and/or by complete application systems, and considerable programming work is being offshored–see my post telemigration.

Biden also asserted that:   “Anybody who can throw coal into a furnace can learn how to program, for God’s sake!”

Ignoring the inherent ridiculousness of this claim as a factual assertion…does Biden actually think that manual stoking of coal furnaces is a thing in today’s economy?   Does the Bureau of Labor Statistics show a large count of people employed as stokers?

In reality, the mechanical stoker was invented well over a century ago.   They were common in high-horsepower steam locomotives by 1900, and were and are used in coal-fired power plants.   I doubt if there was much manual stoking going on by 1940, except on steamships…and coal as a fuel for ships was rapidly on its way out by that point, as it was being displaced by oil

Plus, Biden was talking about coal miners.   Does he think that there are coal-fired furnaces in coal mines?   If there were, you would likely get a massive explosion from igniting of any gas in the mine.

Biden clearly understands as little about the software industry as he does about the energy industry.

This is the man who says he was Obama’s point man on a “jobs of the future” initiative.

Can you imagine what these people would do to the economy if they ever achieved the degree of power that they so avidly seek?

 

 

Life Without Smartphones

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A college instructor, concerned about how poorly his students were doing in the philosophy class he was teaching, tried an experiment:   for extra credit, students could give up their phones for nine days and write about living without them. Twelve students, about a third of the class, took him up on the offer.

Without their phones, most of my students initially felt lost, disoriented, frustrated, and even frightened. That seemed to support the industry narrative: look how disconnected and lonely you’ll be without our technology. But after just two weeks, the majority began to think that their cell phones were in fact limiting their relationships with other people, compromising their own lives, and somehow cutting them off from the “real” world.  

See some of the student comments at the link.   Note that ten of the 12 students said their phones had been compromising their ability to have real-world relationships.   And in response to a student’s comment about safety concerns when phone-less, the instructor said:

What’s revealing is that this student and others perceived the world to be a very dangerous place. Cell phones were seen as necessary to combat that danger. The city in which these students lived has one of the lowest crime rates in the world and almost no violent crime of any kind, yet they experienced a pervasive, undefined fear.

For perspective, though, we should consider:   How would students in say, the 1950s through the 1980s have responded if they had been temporarily denied access to dorm or apartment phones and also to pay phones?   Because since smartphones became common, pay phones have largely disappeared, and I’d imagine that dorm and apartment phones are pretty rare as well.

I’d hazard a guess that 1950s-1980s students who were denied access to conventional telephony would have felt somewhat disconnected, but not nearly so much as present-day students without their smartphones.

When the telegraph was first invented, a journalist marveled that “This extraordinary discovery leaves…no elsewhere…it is all  here.”

As I’ve noted before, it seems that if the wired communications reduced the sense of elsewhere, it seems that wireless communications reduces the sense of the here and now.