Opinion

Felix Salmon

Wage deflation charts of the day

Felix Salmon
Jul 9, 2013 16:54 UTC

NELP, the National Employment Law Project, has taken a detailed look at what happened to wages during the recovery — specifically, between 2009 and 2012. They looked at the annual Occupational and Employment Statistics for three years — 2007, 2009 and 2012 — and created a list of wages for 785 different occupations. They then split those occupations into five quintiles, according to income; the lowest quintile made $9.49/hr, on average, last year, while the highest quintile averaged $40.23/hr.

But let’s not look at averages, let’s look at the actual disaggregated data. Here are some charts which Ben Walsh laboriously constructed, and which need a little bit of explanation. Each thin line is one occupation, with nominal wages rebased to 2007=100. As a result, these charts show increase in wages, rather than absolute wages: the lines which rise the most are the ones with the biggest pay raises, not the ones with the highest pay. (Although, as you’ll see, the two are highly correlated.)

The two green lines show inflation: the dark-green line is CPI, while the light-green line is CPI-U, the urban index used by NELP. As a result, all the jobs below the green lines saw real wage declines between 2007 and 2012, while all the jobs above the green lines saw real wage gains.

The charts are presented in order, with the 1st quintile — the lowest-earning occupations — first. You can see that while wages grew in both real and nominal terms between 2007 and 2009, there was a decided flattening off thereafter, and inflation started overtaking a lot of jobs from 2009 onwards. The actual figures: real wages grew 1.9% between 2007 and 2009, and then fell 2.8% between 2009 and 2012, which means that over the full five-year period they fell, overall, by 0.9%.

1stq.png

2ndq.png

3rdq.png

4thq.png

5thq.png

As you go down the charts, you can see that until you get to the fourth and fifth quintiles, most jobs fall below the green lines — which means that they’re seeing their real wages fall. You can also see the commodification of low-wage jobs in the the number of occupations in the bottom two quintiles: there are just 47 occupations in the bottom quintile, while there are 186 occupations in the top quintile. (Each quintile, of course, includes the same number of total workers.)

The big-picture lesson that NELP draws is that between 2009 and 2012, real median hourly wages fell by 2.8% — and that the poorer you were to start with, the more your wages fell. The top quintile didn’t do well: their wages dropped by 1.8%, in real terms. But the fourth quintile did particularly badly: its wages fell by 4.1%, on average. To take one example, occupation 39-5012 — that’s Hairdressers, Hairstylists, and Cosmetologists — was earning $12.00 an hour, in 2012 dollars, in 2009. But by 2012 they were earning just $10.91 per hour: a drop of more than 9%. Or look at occupation 51-6042 (“Shoe Machine Operators and Tenders”): that job saw wages fall 14%, in real terms, in just three years, with nominal wages falling from $12.69 to $11.69 per hour.

The charts show the large range of outcomes: some occupations are doing great. At the top end, the highest-paid profession on the list, Psychiatrists, went from earning $69.48 per hour in 2007, to $83.33 per hour in 2012. That’s a real increase of 8.3%. But overall, everybody is doing pretty badly. Here’s the NELP chart:

nelp.tiff

This chart shows where a lot of the current stock-market strength is coming from: capital is taking more than 100% of real productivity gains, with labor steadily losing out. This, I fear, is the New Normal: OK for investors, bad for workers.

Finally, just because I love it, here’s the list of people earning between $26 and $27 per hour, on average. Here Roof Bolters keep company with Social Workers, Librarians hang out with Foresters, and — of course — Public Relations Specialists linger near Writers and Authors. Luckily the Police and Sheriff’s Patrol Officers are there to keep the peace.

26.tiff

COMMENT

Moopheus, the cost of benefits to employers is nonetheless increasing. Health insurance is through the roof the last few years.

Posted by TFF | Report as abusive

Chart of the day: The long decline of labor

Felix Salmon
Sep 26, 2012 10:21 UTC

2012-13-1w.gif

This chart comes from Margaret Jacobson and Filippo Occhino at the Cleveland Fed, and it’s reasonably terrifying — yet another one of those charts where the trend is down and to the right, and where it’s only gotten worse since the end of the recession.

What you’re looking at here is the share of total national income which is accounted for by labor — a measure that includes wages, salaries, bonuses and things like pension and insurance benefits. Everything else is capital income: interest, dividends, capital gains. There are two ways of measuring this, which is why there are two lines; both of them are telling the same story.

The fascinating thing to me, here, is what has happened since the crisis. Over the past three years or so, wages and salaries have been rising steadily, while interest rates have been stuck at zero. It’s never been harder to make income from capital, while incomes for people with jobs have actually kept on rising. And unemployment, while still high, has been coming down.

Given all that, it would stand to reason that the share of national income going to labor should be rising, not falling. Labor incomes are going up, the number of employed people is going up, and income from savings is going down. And yet! It turns out that people with capital are so rich, and getting so much richer, that it’s not even close. All that belly-aching about the plight of savers on fixed incomes in a zero interest-rate environment? Well, you don’t see it in these numbers. Looking at this chart, if you were given the choice between having money and no job, or having a job but no money, it’s not obvious which one to go for.

Of course, as the Cleveland Fed paper shows, a lot of the story here is about rising inequality. But the more powerful, if less obvious, story, is just how entrenched capital income has become in the US economy. As recently as 2000, it was at levels more or less in line with the historical average. And then, something big happened. During the Great Moderation — when yields fell on all capital asset classes — capital income went up sharply. Then the crisis happened, a classic case of a dog not barking: you’d expect capital income to have fallen enormously, at least for a year or two, but it didn’t, it just stopped rising. Most recently, in the wake of the financial crisis, capital income has been soaring again.

There’s a big lesson here for anybody serious about fiscal policy, too. (Paul Ryan, I’m looking at you.) As the labor share of income goes down and the capital share of income goes up, the only way that we can stop tax revenues from plunging disastrously is to tax capital income at least as much as we tax labor income. By contrast, the Ryan plan proposes taxing capital income at zero — putting ever more of a burden on working Americans, while giving unearned income a massive tax break the rich really don’t need.

There are big global forces driving this chart, most importantly the way in which labor is becoming increasingly global and fungible. Labor income has been declining for a good 25 years, and the only substantial countertrend was the dot-com bubble. The trend is a bad one, and it’s getting worse. And while I don’t see any policies, on either side of the aisle, which really try to address it, the fact is that Republican policies seem explicitly designed to exacerbate it. Think of capital income as the money flowing to “job creators”, and the chart is very clear on that front.

COMMENT

More @mlnberger than Felix, note that 1) individuals have continued to see their wages increase over the period of their working lives; each cohort is seeing lower wages with the requisite delay, and 2) since the guy before you mentioned demographics, it’s interesting to note that the incomes of different racial and ethnic groups have gone up faster than the overall level of income as the lower-income race/ethnicity groups have increased their share of the population and whites in particular have decreased their share of the population.

Posted by dWj | Report as abusive

Can unions become relevant again?

Felix Salmon
Jun 7, 2012 15:00 UTC

Bruce Western and Jake Rosenfeld* have an impassioned plea in Foreign Affairs for the return of unions as a political and economic force. There’s no doubt of a very strong connection between the decline of unions, on the one hand, and the rise of inequality, on the other — and as inequality slowly tears this country apart, the need for a force that could bring the majority of people together has never been greater.

According to their figures, more unionization might reduce GDP growth by a decimal point or two, but could increase compensation for unionized blue-collar workers by between 10% and 20%, while simultaneously improving wages for similar non-union jobs. That seems like a decent deal to me. After all, the lesson of the current recovery is that GDP growth has little value if it’s not accompanied by more and better jobs.

But as the results of the Wisconsin recall election show, Middle America doesn’t trust unions to represent its interests any more. When Western and Rosenfeld say that unions should “take on the challenge of improving productivity and profitability at the local level”, and embark on a “national campaign against inequality”, I think they’re biting off much more than unions can reasonably chew. There’s really no evidence that unions are good at increasing productivity, and neither is there much evidence that unions or anybody else will ever be able to construct a campaign against inequality which really strikes a chord with most Americans.

Joe Nocera, too, has recently rediscovered a nostalgia for the days of unionization, and is right to say that the country would be better off if more jobs were unionized. But in an age where political discourse on both sides of the aisle is dominated by the influence of capital rather than labor, this kind of wouldn’t-it-be-great-if thinking isn’t going to get anybody very far, especially in a world where the idea of a job for life has long since disappeared. I don’t know what a truly modern labor movement would look like, but I’m pretty sure it won’t take the form of a political campaign against something as abstract as inequality.

The fact is that in a globalized world, American workers need their big multinational employers more than the big multinational employers need American workers. One of the biggest secular forces in the decline of labor has surely been the glut of skilled and unskilled workers coming onto the international labor force in recent decades, particularly in China. As a result, I suspect that any truly important next-generation social movement will be profoundly international in nature, and will have to make big strides in China before it has any real effect in the US. Laborers in Chinese factories aren’t just competing with US workers for jobs: they’re also, in a weird way, the best hope those US workers have for real improvements in how they’re treated and paid.

*For people wanting to link to this article: do not copy-and-paste its URL; copy my link instead. And even that will only work until June 18. Foreign Affairs really needs to understand how people share articles, its current system is a nightmare.

COMMENT

“But pure at will employment in the public sector is exactly what produces corruption.”

Excellent point, Dollared. And true. You hear countless stories from the 70s around here of selectmen receiving favorable treatment for their kids in school (or making hell for the teacher who dared give their daughter a C). Unions protect against corrupt politicians.

“Public sector employees generally do not need a lot of “protecting”, since their employers, i.e. the taxpayers, are not seeking to profit from their labor,”

@mfw, that is reversed. Most taxpayers don’t have a horse in the race at all. Their ONLY motivation is to get the job done cheaply. At least in the private sector, there is a profit motive. If you cut support and increase workload beyond what is manageable, then your better employees will leave and your business will fail. Because the taxpaying public has no interest in the quality of the product, there is nothing to halt the downward slide.

Unfortunately many public unions have focused more on compensation than on working conditions. They accept an impossible workload in impossible conditions, as long as they get paid well for it. This is again a place where the adversarial approach has broken down.

There are definitely differences between public-sector and private-sector unions, especially in the perception of such by the public. But it is hard to imagine a quality result in education when the ONLY organized group at the table is the board of selectmen.

Posted by TFF | Report as abusive

International labor mobility datapoint of the day

Felix Salmon
Sep 2, 2011 13:50 UTC

One of the main reasons for the euro experiment failing is the obvious fact that the eurozone doesn’t have a common language. An optimal currency area needs labor mobility — areas without jobs need to provide workers for the areas with demand for them. But it’s hard to get a good job in Germany if you don’t speak German. And so something quite astonishing is going on:

In 2006, only 156 Angolan visas were issued to southbound Portuguese, but in 2010, the figure was 23,787.

To put that number in perspective, total emigration from Portugal — to all the countries in the rest of the world combined — ranged between 12,000 and 17,000 a year in the 1980s. Portugal is a very small country, and it hasn’t seen this level of emigration since the 1960s.

One reason: for skilled workers, a job in Angola pays a lot more than a similar job in Portugal: for a civil engineer, we’re talking four times as much, according to one Portuguese entrepreneur in Luanda. And there’s similar demand for skilled workers in fast-growing Brazil, too.

From a global perspective, this is good news. Developing countries like Angola and Brazil get to leverage western European education, while underemployed Portuguese find good jobs abroad. It’s an example of the cross-border labor market actually working.

From a European perspective, on the other hand, there’s a lot to worry about here — the PIGS aren’t going to recover if they lose the highly productive workers they spent so much to educate. But they can hardly wall those workers in and prevent them from moving to greener pastures. The only solution is domestic job creation. And that’s hard to do when you’re on an austerity regime.

COMMENT

plus Chinese is so easy to learn and has no cultural or political baggage

Posted by johnhhaskell | Report as abusive

It’s time to get working on labor mobility

Felix Salmon
Aug 20, 2011 16:05 UTC

One of the problems with the news cycle is that perennial issues — problems and solutions both — tend to get ignored in favor of things which have changed in the last few hours or days or weeks. As a result, when it comes to the global economic crisis — the thing which came to the world’s attention in 2008 and which no amount of Panglossian dreaming of V-shaped recoveries can wish away — one of the key potential solutions has been left all but ignored from the outset of the crisis through the present day.

So it’s worth taking a big step back, and looking at the global economy from 30,000 feet. When you do that, you see a lot of wasted resources — in food, in energy, in water, and of course in war. But add them all together and they still don’t come close to the human resources that are wasted every day. This is the 21st Century — the age of information technology and service-sector value-addition. The two most valuable companies in the world, Apple, and Exxon Mobil, both have fewer employees than the population of Moses Lake, WA. The right people in the right place are worth more now than at any point in history — even as the total population of the planet, and therefore its gross human potential, has never been higher.

At the same time, however, the universe of people with the potential to really change the world is vastly smaller than it ought to be. Silicon Valley entrepreneur Marc Andreessen, writing in the WSJ on Saturday, complains with good reason:

Many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent. Qualified software engineers, managers, marketers and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers any time they want, while national unemployment and underemployment is sky high.

Does the world have a shortage of good software engineers? Yes. Does Silicon Valley have an artificial shortage of good software engineers? Yes. There are lots of highly-qualified software engineers from India, Russia, and elsewhere — even Canada — who would love to work in Silicon Valley but can’t, for visa reasons. Even if you got your qualification at Stanford University, right in the heart of Silicon Valley, it’s decidedly non-trivial to get a job in Palo Alto or Cupertino upon graduation. You know the companies, you know the people, they know you, they would love to hire you — but the Bureau of Citizenship and Immigration Services gets in the way, and forces you out of the country instead.

If you’re more ambitious than that, of course, the situation gets even worse. There are at least ways of getting a work visa in the US; they’re far too onerous, and leave far too much to chance, but it’s possible. If you want to become an entrepreneur, on the other hand, there’s really no point in even trying. Recent graduates are perfectly positioned to build the great companies of the future: they’re bright, they’re hard-working, they’re up to speed on the state of the art, and they generally don’t yet have families which require job security and a steady income. But if they’re not US citizens, it’s almost impossible for them to build the economy of the future in this way.

And Silicon Valley has historically been a very good place for immigrants — think Intel’s Andy Grove, or Google’s Sergei Brin. It’s no coincidence that the most vibrant areas of the economy are also the places with the highest immigration. Immigrants — especially rich and well-educated immigrants — work hard, create jobs, pay much more in taxes than they take out in benefits, and tend to have overachieving children: they’re a recipe for economic growth and prosperity. The US is a nation of immigrants; from the Statue of Liberty’s beaconed hand glows world-wide welcome, at least in theory. In practice, the US has shot itself in the foot in this regard, especially when compared to its Anglophone competitors like Canada and England. America would have an all but insurmountable competitive advantage in the fight for talented immigrants, were it only to bother competing.

Take another step back, and the lack of mobility of the skilled global elite is a microcosm of a much larger problem, which is the lack of labor mobility more generally, both between and also within countries. Detroit, for instance, has painfully high levels of unemployment just because there aren’t nearly enough jobs in the city, any more, to support its population. The solution is for people in Detroit to move to where jobs are more plentiful. Similarly across the US: one of the reasons why a single currency works well across 50 disparate states is precisely because there’s a decent amount of labor mobility between those states. But as a rule, the more labor mobility the better, and one way of ensuring that jobs get filled by the best-qualified people is to maximize the ease of moving geographically from one job to another.

Moving is always painful, of course, especially for families, but this is one area where homeownership is very much a bad thing. Selling a house is difficult, expensive, and time-consuming — all the more so in today’s depressed market, when millions of homeowners are underwater on their mortgages. In the short term, the government should be doing everything it can to bring liquidity back to the real-estate market — and that means forcing banks to do principal reductions on underwater mortgages. In the long term, it should phase out the mortgage-interest tax deduction, which artificially increases homeownership and decreases labor mobility.

Improving labor mobility is not easy. Italy, for instance, has been a unified country with a single language and a single currency for 150 years, but it still has minimal labor mobility from the south to the north. The lack of labor mobility has been one of the biggest macroeconomic problems facing the Eurozone; again, the millions of unemployed people in the south are not filling jobs in the north. (There’s a bit more mobility from east to west, but not much more.) And globally, discrimination on the basis of one’s country of nationality is the one universally-condoned form of discrimination still in existence: every country in the world puts up significant barriers to prevent foreign nationals from living and working within its borders.

This is not a problem which can or even should be fixed overnight. But it’s a huge problem all the same, and the world’s policymakers should be working on it rather than ignoring or exacerbating it, as they’re doing at the moment. If we want to maximize long-term growth, eradicate global poverty, and give everybody in the world the opportunity to achieve their potential, then a vast improvement in global labor mobility is top of the list of prescriptions.

COMMENT

The right people in the right place at the right time are indeed valuable. With this confluence, businesses will have people working for $1 a day. America will be a 3rd world country – actually all countries will be 3rd world with a very few rich spread out in a few world wide affluent cities.

I was a boy scout, straight A student through college (engineering), and I don’t buy this “free trade” “no borders” guff for a second. I believe in the American dream and of human rights. Everything that businesses want is antithetical to this.

Wake up and stop parroting industry talking points. There never has been a shortage of high tech workers. Do your homework and research. You’ll find that visas like the H1-B were designed solely to undercut the wages of high educated workers.

Man you are pedestrian.

Posted by allanc | Report as abusive

Privatizing Wisconsin

Felix Salmon
Feb 22, 2011 15:29 UTC

Ed at Gin and Tacos picked up on a particularly audacious section of the Wisconsin budget-repair bill yesterday: the governor can sell off any state-owned heating, cooling, and power plants he likes, at any price, to anybody he wants, without any kind of auction or bid-solicitation process, and such a sale would be defined as being in the best interest of the state and to comply with criteria for certifying such a transaction.

Ed calls this “a highlight reel of all of the high-flying slam dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism” — but as Yves Smith notes, the sad fact is that all this language is gratuitous: if you’re a state, there are essentially no legal restrictions on how to privatize state-owned industries and franchises if you’re so inclined.

It probably comes as little surprise to note that the most lucrative privatizations have generally been done by parties of the left: I’m thinking in particular of the UK’s auction of 3G licenses, which netted the Exchequer $35.4 billion at the height of the dot-com bubble.

Right-wing parties, by contrast, are more prone to thinking of privatization as something inherently good, and of monies flowing to the government as a kind of taxation which is inherently bad.

And then of course there’s the other spectrum, from clean to corrupt, which is orthogonal to the left-right spectrum — the more beholden the government is to special interests, the more likely those interests are to wind up with sweetheart deals. Sometimes, the special interests in question are public-sector unions, which find themselves able to negotiate the kind of final-salary defined-benefit pensions which are now threatening state solvency and municipal bond markets around the country. At other times, the special interests are large corporations looking to buy up lucrative monopolies on the cheap. In both cases, elected politicians are not the best people to ensure a good deal; non-partisan career civil servants tend to generate much better results.

The advantage of privatization in cases like the Chicago parking meters is that it removes the utility from political meddling — in that case, from local aldermen who would always agitate for parking rates well below the optimal level. (Relatedly, if you haven’t read it yet, go read Ed Glaeser’s Atlantic essay on the massive economic cost of urban zoning regulations.)

But in the case of Wisconsin-owned energy plants, such considerations don’t come into play. There’s no reason to believe that the private sector will run those plants in a way that is better for the public, and every reason to believe that they will run the plants in a way that is worse (ie, more expensive) for the public. If the state wants to cut such a deal in return for a one-time check, that check had better be enormous. And there’s absolutely no reason to believe that it will be.

(Crossposted at CJR)

COMMENT

If anyone is interested, the Legislative Audit Bureau conducted an audit and found NO deficit. The deficit as “wiscottie” stated was created by Walker in the first 6 weeks of his “reign”…

As a public worker in Wisconsin, we had already agreed to the cuts he proposed and his answer back to us was NO. He would not accept that, it must also be accompanied by our collective bargaining rights.

We have one of the most solvent, well-managed retirement systems in the country. We share the opinion that we must contribute and share the load. But this is a load of crap…we won’t go down without a fight.

Posted by carebear10 | Report as abusive

What will replace unions?

Felix Salmon
Jan 10, 2011 21:21 UTC

Jim Surowiecki has an excellent column this week on the declining influence, and increasing unpopularity, of labor unions:

The advantages that union workers enjoy when it comes to pay and benefits are nothing new, while the resentment about these things is. There are a couple of reasons for this. In the past, a sizable percentage of American workers belonged to unions, or had family members who did. Then, too, even people who didn’t belong to unions often reaped some benefit from them, because of what economists call the “threat effect”: in heavily unionized industries, non-union employers had to pay their workers better in order to fend off unionization. Finally, benefits that union members won for themselves—like the eight-hour day, or weekends off—often ended up percolating down to other workers. These days, none of those things are true…

Labor may be caught in a vicious cycle, becoming progressively less influential and more unpopular. The Great Depression invigorated the modern American labor movement. The Great Recession has crippled it.

I can’t envisage unions ever getting their mojo back in the US private sector. At the same time, however, I can envisage a world in which the pendulum of power starts swinging back towards labor and away from capital. What I’m very unclear about is how that’s going to happen. Unions have lost their power, and Marxian rhetoric in general, about class or rent extraction or the balance of power between capital and labor, is treated with great suspicion by the broad mass of the population.

Meanwhile, of course, as Chrystia demonstrates, the people who control capital are willing and even eager to take money they would otherwise use employing middle-class Americans, and spend it on cheaper and equally productive workers abroad.

If the era of the union is over, as it seems to be, what other countervailing force will work to preserve the value of labor? Somehow I doubt that an epic shift to a new human age will manage to do the trick.

COMMENT

I’m so late to this thread that few will probably read this but my two cents on who will replace Labor unions in the fight vs capitol is AARP.

AARP is already fighting hard to defend social security which for the first time is a negative income stream for uncle Sam. Keeping that promise was easy when it meant billions coming in for congress to steal for other uses… during the recession it meant that briefly billions were going out as so many were unemployed and so many filed for early retirement benefits.

The number crunchers think that negative cash flow will temporarily reverse back to positive… but only for a couple years at most. Soon the outflows will exceed inflows permanently. Then each budget battle in congress will include a fight over social security and Medicare.

AARP will organize an army in the tens of millions to fight for the benefits they have been promised. There will be rallies, marches, town hall meetings, all of it. In the end I think they will succeed in keeping social security largely untouched… taxes will be raised on the affluent.

Medicare as it is currently structured is toast. My wife’s grandfather, a war hero, a 45 year contributor in the work force and a great guy all around was life-flighted 3 times (this at 77 and twice at 79 years old)from the rural hospital near his home to a major hospital. He probably spent 3 months in an ICU at what $2,500/day?

That math can never scale as the population of seniors skyrockets.

Preventive care will be covered, generic drugs covered,
but helicopter rides to the ICU for a 4 week stay that buy you another 4 months of a low quality life won’t last the fiscal reckoning that has already begun.

The old (retired, semi-retired and retired) will join hands with younger workers demanding that corporations and their affluent shareholders support those who have less.

Posted by y2kurtus | Report as abusive

What bankers can learn from arc-welder manufacturers

Felix Salmon
Mar 1, 2010 14:48 UTC

The WSJ today gives a surprisingly favorable review to Spark, by Frank Koller, a book extolling the virtues of Cleveland manufacturer Lincoln Electric and its no-layoffs policy:

Mr. Koller contends that layoffs deprive companies of profit-generating talent and leave the remaining employees distrustful of management—and often eager to find jobs elsewhere ahead of the next layoff round. He cites research showing that, on average, for every employee laid off from a company, five additional ones leave voluntarily within a year. He concludes that the cost of recruiting, hiring and training replacements, in most cases, far outweighs the savings that chief executives assume they’re getting when they initiate wholesale firings and plant closings.

The review comes in the wake of an FT op-ed by George Akerlof and Rachel Kranton, which is a good place to start if you’re curious about whether you should buy their book:

Fair compensation should not be confused with outsize bonuses. In identity economics, performance pay demonstrates bad faith. It tells employees they are not trusted to do the right thing…

Acting in your own interest and not in the interest of clients is a failure to carry out the duties of office, to fulfil one’s fiduciary duty. While principles and responsibility sound lofty and idealistic, they can be taught, followed, institutionalised and enshrined in law. We see it every day in fire stations, on factory floors, in surgery rooms and schools. It is time to treat Wall Street like Main Street. Otherwise, it is just more risky business.

I’m not sure there’s enough here to discern a trend, but at the very least we’re seeing some signs of pushback, in the FT and WSJ, against the conventional wisdom of labor economics.

It’s also worth performing a thought experiment: how bad would the crisis and subsequent recession have been if there was no such thing as bankers’ bonuses, and banks instead paid very large salaries to their top employees? My feeling is that we would be much better off right now, and that a professionalized banking system, which looked and felt much more like other professions like doctors and lawyers, would be a much less systemically-dangerous place.

And remember too that doctors and lawyers almost never get laid off.

The problem, of course, is that it’s essentially impossible to get there from here. Still, it’s intriguing to think of what might happen if bankers started behaving a lot more like arc-welder manufacturers.

COMMENT

Felix,

Thanks for the reference to my new book SPARK about Lincoln Electric a few days ago in your column about bankers learning from arc-welders (March 1, 2010.) What author wouldn’t appreciate that?

However, I think you may have missed a key part of what makes Lincoln Electric’s incentive system work so well – and that is, in fact, the possibility of earning huge profit-sharing bonuses at the end of each year. Dangerous when bankers get them, no argument, but critically important to Lincoln Electric’s success. It’s absolutely true that the no-layoff policy is an equally important and reinforcing part of the system, along with a true open-door policy to senior management and a sophisticated merit-ranking of performance. Labor economists these days describe these relationships with the wonderfully awkward term “complimentarities.”

(I realize that you probably haven’t read the book, just the WSJ review – we’re all to busy)

The bonus at Lincoln Electric began in 1933, in the depths of the Depression, when workers approached James Lincoln to ask if there was a way to forestall the inevitable layoffs. With echoes of another era of labor relations, they asked “if we did more, tried harder and worked together as a real team, could the company pay us more?”

Their question fell on receptive ears. Lincoln had just heard a speech by Franklin Roosevelt arguing that American workers needed a “more abundant life” and he agreed to a one-year experiment.

12 months later, he passed out a bonus which represented 22 percent of each worker’s basic earnings. The next year, the bonus rose to 30 percent, then 51 percent and by 1941, it was 111 percent.

In 1942, Lincoln found himself hauled before a Congressional committee which believed his bonus system was a tax dodge. The sub-text of the hearing has that just a few months after Pearl Harbor, he was engaging in war profiteering.

Meanwhile, Lincoln Electric had already become the major manufacturer of arc welding technology in the US – a position it has held globally since then – as well, the major supplier to the war effort in helping to build Liberty Ships, airframes and tanks and supplier of free technological advice to its smaller competitors such as GE and Westinghouse. Lincoln eventually and effectively refuted all their charges, although he continued to be angered for years by a comment from a senior IRS official that “no man who works with his hands in America deserves to earn $5,000 a year.” The bonus was already proven, in Lincoln’s eyes and those of everyone else in the company, to be a powerful incentive to increase productivity, and hence sales and profits.

The bonus has been paid every year since 1934. That reality, of course, means that the firm has been profitable every year since 1934. For many years, the total bonus pool has been set at 32 % of gross profits (EBITB for the accountants,) an extraordinary amount in the American economy. It has averaged out at 70 percent of each employee’s base wages – base wages which have always been set higher than the local norms in northeast Ohio to attract the most skilled workers.

Last December, I attended the ritual which has grown out of that first approach by workers to James Lincoln in 1934: the annual announcement in the company cafeteria of the profit-sharing bonus by the current CEO. The 2009 bonus represented 37 % of each employee’s base wages, an average check to the firm’s 3,000 American workers of $16,660. The previous year, 2008, the numbers were 61 % and $29,000.

And of course, as an example of the “complimentarity” of the system, in neither year were any permanent employees laid off.

The last recorded layoff for economic reasons at Lincoln Electric seems to have occurred in 1948, although the HR records are murky back then. In 1945, James Lincoln told President Harry Truman that the last layoff had been in 1925.

The opportunity to earn a big bonus and enjoy steady (albeit certainly hard) work need not, a priori, be dismissed as an invitation to the rapacious bad behaviour we’ve seen on of Wall Street in recent years. That’s one of the lessons I suggest in SPARK.

cheers

Frank Koller

Posted by FrankKoller | Report as abusive

How the Teamsters successfully played the CDS market

Felix Salmon
Feb 2, 2010 16:25 UTC

The fight between capital and labor has been a bit lopsided of late, so I’m quite happy to see that the Teamsters seem to have scored a real win from their latest PR campaign against Goldman Sachs.

Goldman Sachs stopped making markets in bonds and credit default swaps (CDSs) on US freight company YRC Trucking for around two weeks from December 16, as part of an effort to stave off a public relations catastrophe. The decision to stop quoting on YRC is understood to have been taken at a very senior level in Goldman, after freight union International Brotherhood of Teamsters (IBT) sent letters to congressmen, senators and state attorneys-general accusing the bank of encouraging investors to torpedo YRC’s restructuring – which would have threatened the jobs of around 30,000 IBT members.

Later on in the article there’s bellyaching from anonymous credit traders that the IBT seems to be using the CDS market as a bugaboo much more successfully than semi-mythical “empty creditors” have ever been able to use it to force bankruptcies. “The episode has sparked concern,” write the authors with a straight face, “that failing companies could use political pressure to strong-arm banks and investors into backing restructurings”.

Doesn’t your heart just bleed.

Personally, I’m far from convinced that empty creditors are a real problem. But if they can be used as a bogeyman to save jobs and prevent unnecessary and costly bankruptcies, then they will have served some good purpose. Well done to the Teamsters for executing this strategy so well, and I look forward to its being used again in future.

COMMENT

Tomrus,

Assuming this is a net negative for welfare (and I have no idea whether it is), the simplified answer would be the holdout effect. To do a restructuring, you need substantially all creditors on board. The CDS swap gives a party an incentive not to be onboard. And so a transaction that destroys value (i.e., the company’s liquidation value is smaller than its going concern value by at least the CDS spread) can go through.

The question is, in these circumstances, why wouldn’t the other parties make a side deal to make not crashing the company worth its while?

Posted by AnonymousChef | Report as abusive
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