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The Economy's Real Problem: That Overpaid Working Class

The real problem facing business today? All those overpaid line workers. That's the conclusion of a new report from consultants Booz & Co., which will surely be welcome news for the many CEOs now surviving on food stamps.

The study is a masterpiece of rationalization. Using a dizzying pallet of business jargon, the authors have created an argument for non-executive layoffs and wage cuts hermetically sealed from what the rest of us are inclined to call "reality." It is a wonderful place entirely free of people like former GM CEO Rick Wagoner and Richard Fuld, the last CEO of Lehmann Bros., who respectively got $14 million and $34 million a year to bankrupt their companies. (I don't remember what Fuld's golden parachute was, but Wagoner got $20 million for driving the world's largest corporation into a ditch.)

The core of the consultant's argument is this:

Compensation policies have gotten woefully out of whack, such that wages for some workers in some jobs greatly exceed what the market says those jobs are worth. ... Workers with many years of service have seen their wages grow in a steady trajectory year after year, fueled by adjustments for inflation as well as annual merit raises that often surpass the rate of inflation, without any increase in responsibilities or required skills. Repeated enough times, these compensation increases can morph into an exorbitant trend.
Lest anyone think the writers -- Harry Hawkes, Albert Kent and Vikas Bhalla -- are referring to executives (whose salaries have risen 23 percent in the past two years along -- that is, during the Great Recession and its aftermath), their example is named Joe the Mechanic. Messers. Hawkes, Kent and Bhalla are unique in many respects, not the least of which is they are the only people to have noticed income growth in the nation's middle class. As Judge Richard Posner wrote:
Between 1997 and 2008, median U.S. household income fell by 4 percent after adjustment for inflation. It presumably did not rise in 2009, and may not in 2010 either. A median is not an average; average income rose because the incomes of high earners rose, and so the effect was to increase the inequality of the income distribution.
(If you are not familiar with Judge Posner, let's just say he would not take it amiss if someone were to describe him as conservative.)

The authors call the solution to their self-discovered problem "retooling labor costs," which has a poetic ring to it -- one lacking in the far less euphemistic "firing and cutting wages," while at the same time offering a significant update to the tired old "downsizing." Retooling is "a multifaceted and tailored program" that can reap "net labor savings of 15 to 20 percent" and is "less damaging" to workers than other ways of being told you're fired or that you have to swallow a pay cut.

No details are provided on how they ascertained this last result. One can only assume they did not try it out on themselves.

Note the deft phrasing which says, "dump your senior, skilled workers" while eluding any responsibility for the act:

Some employees who are earning more than the market wage for their job can be trained and reassigned -- immediately or eventually -- to job categories better aligned to their wage scale. This would likely be the fate for someone like Joe, the machinist in our example.
And it's not like Joe has no chance at remaining employed:
Valuable workers like Joe could be trained to do jobs that better match their salaries. But because positions are scarcer in the upper reaches of the organizational pyramid, some of these employees, as well as less-proven individuals, might have to take pay cuts or perhaps a voluntary separation package.
Ah, the old we'd-love-to-promote-you-but-there's-no-positions-open line. A classic.

Let me make it clear that the writers are not entirely alone in their opinions on this topic. BNET's Sean Silverstone quotes one man who believes that loyalty to a skilled employee who has worked hard is not in a company's interests. Not only does it harm the company but it "infantalizes" the worker by protecting him from the realities of the marketplace.

What would Henry Ford do?
This is exactly opposite from the view of Henry Ford, who no one ever called a sentimentalist when it came to his work force. While today Ford's breakthrough business decision is thought to be the assembly line, he wasn't the first to use it nor was it what made his company. His truly revolutionary action was doubling the pay of his workers.

In 1914 he began paying $5 per day (about $110 today). It was an extremely profitable move, all but ending the enormous employee turnover problem he (and every other manufacturer) faced. Instead the best mechanics flocked to his company and their expertise raised productivity while cutting training costs. Ford, though, believed a more significant advantage of his policy was that it enabled his workers to afford the cars they were making and expanded his customer base.
But who is Henry Ford when compared to giants of business like Harry Hawkes, Albert Kent and Vikas Bhalla? Sleep soundly, gentlemen, but don't forget that there's a retooling out there waiting for you, too.

Image: Library of Congress

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