Moving Beyond a Lay-Off Culture Towards a More Stable Workforce

I've had a dream or two in which the United States economy reached a level of full employment (95% of the workforce or above employed) and stayed there. Also in these dreams was an economy in which workers would tend to keep their jobs if they did them to the best of their ability and they committed themselves to regular updating of their skills over time.

I sometimes wonder what it must of been like to have been in the labor force between the years of 1948 and 1968 when stable employment in our country helped an American middle class ride an escalator into steadily improving standards of living. Sadly, some missed out on this ride, but most did not.

Then something went wrong with stable employment during the 1970's, and then something went very wrong with the hopes of many for stability in employment beginning after the 1980 Presidential election. Some might say that the decline of labor unions, the collapse of the Berlin Wall, and NAFTA strongly accelerated the trend. But don't also forget the business fad of "re-engineering" popularized by Michael Hammer in his 1993 book Re-engineering the Corporation , offshoring, and the productivity pay-off to employers who could now easily substitute information technology for labor after many years of investment.

Economists are still telling us today with a straight face that that raising productivity will lead to higher living standards over time. But this certainly isn't what happened at all after the 2000 Presidential election when productivity surged while real incomes of four-fifths of American households went nowhere. By this time, our euphemistically named "flexible" economy really began to rest on what had become to a large extent, a lay-off culture.

Unit labor cost is defined as the ratio of hourly compensation to labor
productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them. Increases in productivity is supposed to reduce employer's unit labor cost allowing for higher wages.

Unit labor costs in non farm businesses fell 5.9% in the fourth quarter of 2009, the result of productivity increasing faster than hourly compensation. Unit labor costs decreased 4.7% from the same quarter a year earlier, the largest four-quarter decline since this started being tracked in 1948. And where did incomes go? Where you might expect--nowhere!

Allen Sinai of the economics research firm Decision Economics stated it pretty directly when he was quoted as saying in a February 11, 2010 New York Times article: "American business is about maximizing shareholder value. You basically don't want workers. You hire less, and you try to find capital equipment to replace them."

Microeconomic theory may consider labor as purely one of the substitutable inputs that go into production, but of course, labor is more than just that because wages exchanged for it are central to human well being. I try to be careful about making predictions, but clearly labor dislocation has gotten so out of hand during a Great Recession that followed a lay-off culture lasting more than a generation, that the future will be bright for employers who become well known for not laying off workers and finding other ways to reduce their fixed costs. The value of this good reputation in the future markeplace for America's "talent" will be built right into the employer's brand equity and be measurable.

The MetLife Foundation and San Francisco-based Civic Ventures, a think tank focusing on baby boomers, work and social purpose, recently released a report that suggested that the United States will in fact experience a four million worker shortage with in ten years. If this report is in fact correct, than employers have a strong competitive incentive not wait to begin re-hiring workers and to keep their employees happy going forward by rewarding them appropriately and treating them fairly. But to be competitive within this changed environment, employers will also need to build and maintain their reputations for low or no lay-offs.


Three excellent articles on this subject are:

"Slash and Earn", appeared in the March 20-26, 2010 issue of The Economist
http://www.economist.com/business-finance/displaystory.cfm?story_id=15731230.

"Worker shortage coming as population ages: report", MarketWatch, March 22, 2010
http://www.marketwatch.com/story/worker-shortage-coming-as-population-ages-report-2010-03-22

"Median income rose as did poverty in 2007; 2000s have been extremely weak for living standards of most households", EPI, August 26, 2008
http://www.epi.org/publications/entry/webfeatures_econindicators_income_20080826/