Productivity and Pay: Introductory thoughts

View 811 Wednesday, February 19, 2014

“Transparency and the rule of law will be the touchstones of this presidency.”

President Barack Obama, January 31, 2009

If a foreign government had imposed this system of education on the United States, we would rightfully consider it an act of war.

Glenn T. Seaborg, National Commission on Education, 1983

Today I go back out to Kaiser to get the stitches taken out of my face. My Harry Potter scar – or if you’re from an older generation, my Heidelberg Studentcorps Schmitte – is developing nicely.

Today’s Wall Street Journal has a very thought provoking article

Closing the Productivity and Pay Gap

Companies should either share productivity gains or contribute to public programs instead.

By William A. Galston

http://online.wsj.com/news/articles/SB10001424052702303945704579391070814416410?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303945704579391070814416410.html

I don’t recall knowing of Galston prior to this, and the WSJ didn’t run a bio clip with the article so I looked him up. He’s a Brookings Fellow in public policy, which sets him pretty thoroughly in the mainstream Democrat intellectual community, and thus it’s no surprise that he has been a policy wonk for Clinton and Al Gore. Which doesn’t mean that he hasn’t written a thought provoking essay.

His thesis is simple. Productivity of the American productivity in almost all sectors has increased enormously, but “The Great Decoupling of wages and benefits from productivity, the biggest economic story of the past 40 years, shows no signs of ending. According to a Bureau of Labor Statistics report on Feb. 6, nonfarm business productivity rose 1.7% between the fourth quarter of 2012 and the fourth quarter of 2013. During the same period, hourly compensation (corrected for inflation) fell 0.9%. Since the end of 2010, real compensation has hardly budged.”

Henry Ford is famous for paying his workers a lot more than the then prevailing wage. The idea was that they could then afford to buy his cars.

In 1914, Henry Ford started an industrial revolution by more than doubling wages to $5 a day—a move that helped build the U.S. middle class and the modern economy.

In 1913, to help meet the growing demand for the Model T, Henry Ford turned his attention to improving the manufacturing processes. The business model Ford developed—production on a grand scale, performed by well-paid workers—spread throughout the world and became the manufacturing standard for everything from vacuum sweepers to cars, and more.

. . .

Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever.

http://corporate.ford.com/news-center/press-releases-detail/677-5-dollar-a-day

Note that Henry Ford wasn’t exactly enthusiastic about allowing the workers to dictate their own pay. After Ford bought William Knudsen’s Buffalo N.Y., factory, he commissioned Knudsen to set up a Model-T factory in Buffalo. Knudsen had developed the assembly line to far greater efficiency than Ford’s original concept had been. Knudsen taught the mechanics to assemble the cars in separate stages, and his new techniques – different from Ford’s – in which parts always moved in the same direction, and other techniques. Model T’s roiled out.

“Then one morning Knudsen was stunned to come in and find all the machines idle.

“The workers told him they were on strike. They had decided they didn’t like the piecework rates they were being paid on some of the outside contracts. Knudsen couldn’t believe they were so shortsighted as to break off building the country’s fastest selling automobile [this was 1908] over a minor contract dispute. But the men wouldn’t budge. He decided this was a crisis requiring the advice of the owner himself. At great trouble and expense, Bill Knudsen managed to reach Ford on the primitive telephone in the [Buffalo] office.

Ford listened and said, “That suits me. If the men don’t want to work, get some flatcars and move the machinery to Highland Park [Michigan].

Three days later it was done. Then Ford ordered Knudsen and other managers out to Michigan.”

Freedom’s Forge: How American Business Built the Arsenal of Democracy That Won World War II

by Arthur Herman http://www.goodreads.com/book/show/13152691-freedom-s-forge

Incidentally, this is one reason why Detroit, and not Buffalo, N.Y., became the industrial center of the US after 1910. In those days, there was a definite coupling between productivity and wages. Of course after World War II that coupling was lost, and the unionization of the automobile industry brought about exponential rises in wages and benefits in the US, resulting in the widespread import of foreign made – particularly Japanese – cars, and the beginning of Detroit’s spiral from industrial capital to wasteland; which is very much a part of this story.

So what can be done?

Galston suggests

To explain the compensation/productivity gap, mainstream economists focus on globalization and technological change. The emergence of world markets for labor and capital has put downward pressure on wages for routine and middle-skill jobs. Technological innovation has reduced the number of manufacturing jobs and is poised to do the same in many service sectors.

If Oxford’s Carl Benedikt Frey and Michael Osborne are correct, automation could eliminate jobs in nearly half of all standard occupational categories. Unless other sectors—including many that do not yet exist—pick up the pace of job creation, we could be in for an extended period of slack labor markets.

And

For the sake of economic growth, social mobility and political stability, we must think more boldly about reforging the connection between compensation and productivity. That connection must be accepted as a goal—and norm—across the economy. And to make it real, we should link the tax rates individual firms pay to the compensation strategies they adopt. The point is simple: Firms can either share productivity gains with their workers—or contribute to the public programs made necessary by their failure to do so.

It’s time to get dressed and get ready to go out to Kaiser. I’ll have more on this later today and for the rest of the week. The point is that productivity and pay do have to be coupled, but as more and more can be produced by fewer and fewer people, where should we go? One direction is higher minimum wages. The LA City Council wants to raise the minimum wage for hotel workers to $15.38 an hour because a maid can’t make enough money to buy new tires for her husband’s car, and the family can’t afford a house. IF that makes little sense, perhaps you had to be there for the Councilman’s pitch, which is that everyone who works all day deserves a decent middle class wage, no matter what work they do. Come to that, didn’t I hear the President say something similar recently?

But that, I think, does not couple productivity with pay.

More later. I have to get my face fixed.

Face fixed, got spare set of glasses so not trying to get about with computer glasses (28” focal length bifocals rather than my normal trifocals, alas not photo-grey or whatever they call the automatic sunglasses feature nowadays). Turned out to be a bit more strenuous than I had expected, so I’ll defer my comments on minimum wage. I had the eBook version of Forge of Democracy on my Kindle Fire and started rereading it while I was out at Kaiser, and of course part two of the book is about Henry J. Kaiser. It’s still a good book on just how we turned the American civilian economy based much on Detroit from peacetime to wartime. Doubt we could do that again; but maybe. We certainly managed to train a large work force – Rosie the Riveter and her kin – from untrained to skilled blue collar workers. As well as trained a number of new white collar workers. And the war, for America, lasted only 1942 to 1945 total. Our progress in Iran and Afghanistan are measures of what we can do now. And during the Great Depression we built Hoover Dam and a number of other dam, and started the Federal highway system, and —

It does make me sad. I lived through those years. Few went to college, but none graduated with huge debts for doing so. And after the war there was a huge economic revival. We have so much more going for us now, and yet we are losing more jobs than creating new ones. Unemployment goes down because people stop looking for work, but the number of those with a job grows ever so slowly – so the remedy is to raise the minimum wage? That will put more money among the people and stimulate demand and make everyone rich.

If you believe that, look up the Townsend Plan and read all the favorable comments on the theory, than read what happened to the states that adopted it.

And they never catch wise, the general said….

‘What happens to a nation whose elites laugh at its citizens? . . . What happens to its elites?’

<http://blogs.wsj.com/peggynoonan/2014/02/18/our-decadent-elites/>

——

Roland Dobbins

Albert J. Nock once said that it would be amusing to write an essay on how to recognize that we were entering a dark age. We have known since 1983 that out public school system is indistinguishable from an act of war by a enemy of the United States.

And of course we have the theory that we can get out of this depression by raising the Federal Minimum Wage; this will get more people employed. As evidence for this theory we have the historical case of – I guess my absentmindedness has taken hold. I don’t remember when and where it worked. But surely it has since so many of our elites purport to believe it; surely they are not saying it for the campaign donations from unions?

Case Study: Rolling Back a Bureaucracy

When WW II began we had bad torpedoes. I’ve kept an eye peeled but have seen no evidence that the designers and producers of these crummy weapons ever suffered in any way, or even an admission of who they were. Perhaps the whole situation was covered up at the time in a blanket of wartime security.

Now comes a tale of current weapons procurement with a happier outcome, and there are lessons to be learned. We are shown a way to successfully work around a bureaucracy with strong congressional support.

http://www.strategypage.com/htmw/htmurph/articles/20140219.aspx

Robert

So perhaps there is hope yet? That would be wonderful.

It is late and time for bed. Good night.