A New Way of Looking at Labor

Recently, the New York Times have been doing a series of articles about work in their magazine section. It is called “The Work Issue: Reimagining the Office”. I haven’t read all the way through but I did want to post about the one where the owner of a cleaning service has decided that he would pay his employees better wages than they normally would get. This particular article is called the “Managed by Q’s ‘Good Jobs’ Gamble”.

Normally, when you deliver a service that can’t be improved much by technology (at least not now), then the only way to make more money is to either raise prices or reduce your cost. For a cleaning service, where there are many competitors, vast pool of laborers and no known way of delivering service other than labor, the wage will not be better than minimum wage.

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As aside, NY Times gives as an example of an economic theory called Baumol’s cost disease which talks about a string quartet playing a 30 minute song. No matter how fast the computers become or how many people plug into Internet access, you will still need 4 people to play the quartet.

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However, there is a cleaning service that is approaching this differently. This company actually pays their cleaning personnel much better than minimum wage because their idea is that employees provide long-term value if you treat them properly. You might gain profits in the short-term, but over the long term, you would lose due to high turnover and low quality. To quote a paragraph from the Times:

“Teran believes that most American businesses, and especially the fast-growing start-ups like Uber, have mistaken short-term gains for long-term value, undercutting the share of revenue that flows to workers in a way that will perversely hurt their bottom line. He believes, even more radically, that decades of rising inequality and stagnant wages in America are not an inevitable byproduct of capitalism; instead they come from a simple misunderstanding about how best to deploy workers and recognize the value they bring to a company. The future of jobs in the United States would be very different if Teran’s ideas catch on.”

Yes, indeed, it would.

But would shareholders buy it? The thing is, the shareholders want more money to go to their pockets. We’ve been on this constant wage labor pressure since at least the 80’s when shareholders started to agitate for constant profit improvements. Most of the time, businesses can’t raise prices and they have trouble introducing new services, so the focus have been on material costs and then labor wages. (Or maybe management haven’t been that great.) So in order for more share of the money to flow to the shareholders, money has to be diverted from somewhere. Maybe prices can be raised but often times no. So initially, it probably was cost of goods or energy costs. But since we have moved away from manufacturing to services, that means the only major expense is labor.

Hence the downward pressure on wages.

The article also has its own take on why chief executives don’t think like Teran: short-term incentives.

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“Why don’t more chief executives see the math the way Teran does? In large part because all the short-term incentives of corporate America point them in the opposite direction. Suppose that in 10 years, Teran’s ambitions are realized and Q is a multibillion-dollar company with a million employees worldwide. By then, Teran might no longer be CEO, and the company would be overseen by a board selected by its top investors. Just imagine the pressures on that chief executive. If the company cut worker pay by $1 week, the firm would instantly realize a profit of $52 million a year. Then imagine that the company cut wages by $1 an hour. That would mean additional profit of $2.1 billion. Maybe the chief executive would realize that cutting pay would inspire many to quit. But he could cut the working time in each office by, say, 10 percent, allowing Q to lay off – or not hire – 100,000 workers worldwide.

This is how lousy jobs and stagnant wages arrive. Each company makes a series of relatively small decisions, based on what competitors are doing and what customers and investors are demanding. Soon, a new lower norm is established, and the pressures are on everybody else to follow.”

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Yep, this is what happened the last 30 years or so. And why I say shareholders are part of the problem. We need to somehow change capitalism from a focus on shareholder value to stakeholder value where everybody benefits, not just a few.

I hope this guy succeeds, just to show what an erroneous path most companies have been taking.

Last thing I want to say is that the NY Times article mentioned a book I have heard many times and have tried to find in Nook or iBook: “The Good Jobs Strategy” by Zeynep Ton. I haven’t had luck finding that book but I will keep trying. The author has done a study (or maybe a series of them) of large companies that have been able to pay their people well and yet was able to keep costs down and earn a good profit. She says, there are ways of utilizing people such that they are a source of profit.

Please read the full article by clicking on this link