Matt, in the thread about the middle class you made the following statement:
In today’s day and age there is very little correlation between productivity and labor value.
I don’t particularly agree with that, but in your opinion, what are the consequences of such a situation, broadly speaking?
I don’t particularly agree with that, but in your opinion, what are the consequences of such a situation, broadly speaking?
I’m not quite sure I understand the question. All I’m saying is that productivity is not necessarily correlated to labor value.
The examples I gave before where a situation where a person is now running a machine that takes less ability and skill to run then the previous generations of machine or no machine and allows that lesser skilled individual to produce more then the more skilled individuals. Labor value is degraded if we assume that the machine is a larger portion of the production cost then it was before.
As a specific example if I have ten machiniest running manual machines producing 100 parts a week and I get 10$ a piece for each part and my overhead for the machines, space, profit etc is 1$ a piece I can pay each machinist 90$ a week . If I buy two CNC machines and replace all 10 machinists with a button pusher that runs both machines but my overhead for the machines is now 9.50$ a part I can now only pay the button pusher 50$ a week despite the fact that he is actually 10X more productive then the machinists.
The only consequences I can see are already stated in my statement, labor is not necessarily tied to productivity increases.
~Matt
I would argue that the person running the machines would need to be more skilled, in a different way, than the 10 he potentially replaces, driving his individual wage up while driving the overall labor wages down at the manufaturing location. Newer technology requires more than a “button pusher” to get the most out of it. However, you could easily afford to pay the remaining machinist 2x the prior rate and still have significant cost savings (and 9 other people out of work).
drn92
The only consequences I can see are already stated in my statement, labor is not necessarily tied to productivity increases.
Huh. I guess I assumed you’d have thought a little further down the line.
The examples I gave before where a situation where a person is now running a machine that takes less ability and skill to run then the previous generations of machine or no machine and allows that lesser skilled individual to produce more then the more skilled individuals.
See, this is where part of my disagreement with you arises. I don’t think it’s just button pushers whose labor value has been devalued. I think that workers are not only more productive but also more educated and more skilled than they have been in the past, and yet wages are still stagnant, at best. The phenomenon isn’t simply confined to assembly line workers and the like.
But that isn’t really what I want to talk about. What I’m wondering is this: If we have a broad swath of the workforce whose labor value is not tied to their productivity, what impact does that have on society, big picture wise? Now you have a large body of people who go to work, produce more and more, and yet whose labor is worth less and less. That means they’re less and less able to provide for their own needs, and that of their families, does it not?
What’s the solution? Because here’s what I see happening, and not in the future, either- right now: As workers’ labor been devalued, they are less able to provide for themselves. Increasingly, they become dependent on government to meet their needs. Meanwhile, employers benefit from the increased productivity in the form of higher profit margins.
I would argue that the person running the machines would need to be more skilled, in a different way, than the 10 he potentially replaces, driving his individual wage up while driving the overall labor wages down at the manufaturing location.
That is simply incorrect. I can place a person in front of a CNC machine and have them no nothing more then, open door, open vise, remove part, put another part in, close vise, close door…press button and have them make parts better, faster then a real machinist that would have to know everything about, tool selection, speeds, feeds etc etc etc.
I will concede that SOMEONE will have to know more than that in order to originally program the machine but even that is largely “Less skilled” then the single machinist. You can now, with the proper software, program a part and the software will do all the “Skilled” labor for you, I.E. know all the speeds, feeds for the right tools etc.
That being said this “Higher skilled” individual could program for 10 button pushers.
Newer technology requires more than a “button pusher” to get the most out of it.
Some of it does, which is why I don’t quite understand the OP’s question. At the same time some of it does not. I personally know a guy that did ok owning his own manufacturing company but couldn’t use a manual machine to save his life. He simply let the software tell him what speeds and feeds to program everything. With the right software you can run an entire shop on less then a weeks CAM training and a bit of training on setting tools.** **30 years ago you did not have that option and it would take years of training to get the same thing accomplished.
However, you could easily afford to pay the remaining machinist 2x the prior rate and still have significant cost savings (and 9 other people out of work).
Actually what typically happens is the price of the product being manufactured drops. We are producing the same product today that we did 25-30 years and in some cases are getting 25-30% less for the product in real dollars then we did then. This is even more true for high production products. Wages have not gone up, productivity has, but because of new technology. Prices of the products have dropped.
~Matt
Actually what typically happens is the price of the product being manufactured drops.
Possibly. But what also typically happens is that the company increases its profits.
I don’t have a problem with increased profits, and I don’t think anyone does. The problem is when those increased profits aren’t shared by the workers.
And it is a problem, unless you’re OK with a workforce that can’t support itself by its own labor. That’s the fundamental problem I think you’re evading.
Huh. I guess I assumed you’d have thought a little further down the line.
And that is my question, I’m not sure this is something that can be applied “Down the line” since it is merely pointing out that there is no correlation. How do you think “Further down the line” on something that has no predictive value?
I think that workers are not only more productive but also more educated and more skilled than they have been in the past, and yet wages are still stagnant, at best.
You seem to think that I’m saying this is an “Either or” situation and that is not what I’m saying at all. What I’m saying is that there is no correlation at all. Most definitely SOME workers are more productive because they are better educated. There is also ZERO doubt that in some cases less educated, less killed labor, is more productive because of technology.
Button pushers are called button pushers in my trade because that’s what they are. I can quite literally take a person off the street and with in 15-20 minutes have them pushing a button and producing parts that 30 years ago it would have taken a person with years of training to make. They will be more productive then that person from 30 years ago, produce better parts far more consistently and do so with FAR less skills and FAR less education.
If we have a broad swath of the workforce whose labor value is not tied to their productivity, what impact does that have on society, big picture wise? Now you have a large body of people who go to work, produce more and more, and yet whose labor is worth less and less.
Ok I think I get what your asking and that is what are the consequences for those people who are more productive and less skilled. As I stated that is a slightly different question than what my statement was which was that the two are not correlated. Not correlated meaning could be they produce more with less education or produce more with more education. You’re specifically asking about those that are less educated and more productive.
I think to some degree that the idea of having ones “Labor devalued” is a bit of a misnomer. The person making 8$ an hour now producing 10 parts an hour can become more productive by putting a faster machine in front of them that can make 20 parts an hour. If that faster machine consumes all the gain in productivity via capital expenditures the 8$ guy is not getting paid anymore. Furthermore that 8$ an guy does not have to know anything more to run the 20 part per hour machine then he doesn the 10 part per hour. He’s become twice as productive but is still worth only 8$ an hour. I’m not sure that is “Devaluing” his labor but rather showing that his productivity is not correlated to his income.
What’s the solution? Because here’s what I see happening, and not in the future, either- right now: As workers’ labor been devalued, they are less able to provide for themselves. Increasingly, they become dependent on government to meet their needs.
I think there is downward pressure on wages specifically in the low income areas but it’s not being caused by increased productivity it’s being caused by foreign labor. The US has long been pushing technology to make workers more productive and still pay decent wages in order to compete with low wages in foreign countries. Now those foreign countries are implementing the same technologies we have and still have the low labor. This will hit a head at one point or another where the US can’t keep ahead on technology and the ultimate result is that wages will have to be cut or the jobs disappear entirely.
The solution as I see it is only one, and that is that at some point we will find an equilibrium with foreign labor. As nasty as that sounds that really is the only solution. Everything else is simply a bandaid or temporary work around.
Meanwhile, employers benefit from the increased productivity in the form of higher profit margins.
I only wish that were true. While we might be seeing larger profit margins in the massive corporations for the most part small business America is seeing smaller profit margins then ever. The large corporations are making money buy leveraging cheap foreign labor, not by increasing US margins.
Pretty much every small manufacturer I know, small meaning 1-2 man shop to several hundred FTE’s is running on smaller margins these days then they did 30 years ago. They are attempting to make the same income by increasing production and much of that comes from heavy investment in new technology. Worse yet that new technology investment holds value far less then it did 50-75 years ago. New equipment today doesn’t hold value much better then a car. Investing in a machine 75 years ago was like investing in a house to a certain degree.
Not sure I answered any of your questions or not 
~Matt
Possibly. But what also typically happens is that the company increases its profits.
No, not “Typically”. Possibly, but it’s also very possible that the company decreases profits and almost certain that margins decrease.
I don’t have a problem with increased profits, and I don’t think anyone does. The problem is when those increased profits aren’t shared by the workers.
As I stated in my other response profits in most small business, certainly manufacturing, are not up. They are definitely up in large corporations but that has way more to do with being able to leverage cheap foreign labor and high demand in for product in foreign countries. Why do you think the DOW is taking a crap because China’s economy is slowing down, less foreign sales.
And it is a problem, unless you’re OK with a workforce that can’t support itself by its own labor. That’s the fundamental problem I think you’re evading.
I’m not evading it at all and have in fact for a couple decades now stated that labor in the US that is largely in direct competition with foreign cheap labor will continue to see stagnant or decline wages in the US until they hit some equilibrium with foreign wages.
The problem is not with this fact, the problem is with ACCEPTING this fact. We have a large swath of US labor that is not worth anymore then the cheap foreign labor. However when you add wages and all the other costs to US labor we are paying many times more for the same labor. The ONLY solution is equilibrium at some point or another.
The idea of “Supporting itself” is largely a question of “At what quality of life”. When you’re in competition with a person that is making 5$ a day and living that quality of life then obviously you can’t “Support a lifestyle” that costs 100-150$ a day.
~Matt
No, not “Typically”. Possibly, but it’s also very possible that the company decreases profits and almost certain that margins decrease.
I think it would be unusual for a company to record lower profits as a result of increased worker productivity, and virtually unheard of if the workers themselves aren’t aren’t seeing the increased value of their productivity.
The fact is that on balance, companies *have *increased profits as worker productivity has increased.
** **he idea of “Supporting itself” is largely a question of “At what quality of life”. When you’re in competition with a person that is making 5$ a day and living that quality of life then obviously you can’t “Support a lifestyle” that costs 100-150$ a day.
Well, yes, I guess that’s one alternative- we could achieve equilibrium with the workforces of the third world in terms of quality of life. (I personally don’t see us trending in that direction, but it’s possible. I think it’s unlikely, and if was to happen that way, violent upheaval would be a near certainty. I think it’s much more likely that we’ll simply expand the number of people dependent on government assistance to maintain a quality of life closer to that which we’re accustomed to in the developed world, and more and more people will become more and more entrenched in dependency.) Do you find that an acceptable situation? Or do you see it as simply inevitable?
I think it would be unusual for a company to record lower profits as a result of increased worker productivity,
I don’t believe I said “Because of” I said “In conjunction with”.
If I have 10 employees that are making 10 parts for 10$ each on equipment that cost me next to zero dollars in a week and I’m paying them all 9$ a part the company is making 100$ a week on 1000$ in sales. The employees are each making 90$ a week and are doings so at a production rate of 100$ per week.
Over time I get to the point where I have one person making all these parts that I’m paying 80$ a week, I’m only getting 5$ a part and my equipment cost is 4.10$ a part. Total cost per part is 4.90$ meaning the company is now making 10$ a week, the employee is producing 500$ a week and making less a week then the people that were working 30 years ago.
Net result is the same product at half the price, company with only 10% the profit margin it once had, worker is 5X more productive and is only making 80% what his colleagues made 30 years ago.
You may think that is “Unusual” but I can say that in manufacturing this is pretty much the case across the board for all but those companies that have wide global reach.
**The fact is that on balance, companies have increased profits as worker productivity has increased.
Again, this is not an “Either or” situation. Certainly some companies in SOME sectors HAVE increased profit margins. Some have not.
(I personally don’t see us trending in that direction, but it’s possible.
Why don’t you see this? There is a continual stream of “Disappearing middle class” articles combined with “Stagnant wages” and similar articles. I think there is irrefutable evidence that we are and have been heading toward an equilibrium point for decades. At the same time if you look at countries like China and India you find, particularly in China, RADICALLY increasing wages and a rapidly growing middle class. I’m not sure how you can look at this and not come to the conclusion that we are working on equilibrium and have been for some time.
I think it’s much more likely that we’ll simply expand the number of people dependent on government assistance to maintain a quality of life closer to that which we’re accustomed to in the developed world, and more and more people will become more and more entrenched in dependency.)
Don’t disagree with this but tend to look at this as one of the “Bandaids” that are and will become largely unsustainable.
Do you find that an acceptable situation? Or do you see it as simply inevitable?
Not exactly what you asking about as acceptable, more welfare or equilibrium. I think equilibrium is inevitable no different then gravity for the most part. I find welfare unacceptable and for the most part delaying the inevitable and that is that one must figure out a way to remain competitive in the market. Welfare does not push us toward that goal.
There are of course additional possibilities as well, which are to lower the percent of the population who will end up in this situation. This is done by INCREASING their value in market. That is done buy giving them additional skills that the market values. A button pusher will have to compete globally with button pusher level workers. A tradesmen is likely to have a smaller pool of competition with more valuable skills. As long as we continue to insist that a button pusher or the dude that puts the lug nuts on the Malibu is worth 10X more then the guy doing the same thing in China we will continue to run into this problem.
~Matt
Why don’t you see this? There is a continual stream of “Disappearing middle class” articles combined with “Stagnant wages” and similar articles. I think there is irrefutable evidence that we are and have been heading toward an equilibrium point for decades.
Oh, I’m not saying that the middle class isn’t disappearing. It is. What I’m saying is that we aren’t going to allow our standard of living to fall to that experienced by workers in the developing world. I say that because that’s not really the direction we’re heading in now. (For every article about the disappearing middle class, there’s a dozen responses that even poor people in America have refrigerators and running water.)
What’s going to happen is what’s already happening: The American workforce will continue to increase its productivity, corporate America will continue to take a larger and larger share of that productivity, and more and more people will become less able to maintain a standard of living we associate with a functional modern society. The wealth and income gaps will continue to grow. As that goes on, more people will become dependent on government services, like subsidized health care, fewer people will contribute in the form of income taxes, and so on.
I am all for capitalism, but unfortunately the relentless pursuit of profits by Wall Street has influenced what is deemed important. Companies must be a for profit business, but they are increasing profits at the expense of the very employees they hope will purchase their products. That is one reason the middle class is disappearing and there is an ever increasing wealth gap. Companies and corporations need to have a more holistic view of the world they operate in, including the communities in which they live.
drn92
One other part of the equation to keep in mind is that equilibrium works both ways (at least in the IT sector) 8 years ago the numbers I was given by HR were a ratio of 4 or 5 to 1 i.e. we could open 4 to 5 positions for the same cost as one position in the the US. Salaries have gone up a lot and that ratio is now considered closer to 2 to 1 given the cost of managing those outsourced teams in the same country. I saw the same thing in several low-cost countries where IT salaries at least were climbing at rates of close to 50% per year. At that rate the low cost doesn’t stay that way for long. Some of the outsourced positions have started returning to the US because it is easier to manage teams locally.
Combine that with improved productivity and lower cost for products and things may not necessarily be as dire as folks think. However this is good question to ask and think about potential consequences.
What’s going to happen is what’s already happening: The American workforce will continue to increase its productivity, corporate America will continue to take a larger and larger share of that productivity, and more and more people will become less able to maintain a standard of living we associate with a functional modern society. The wealth and income gaps will continue to grow. As that goes on, more people will become dependent on government services, like subsidized health care, fewer people will contribute in the form of income taxes, and so on.** **
This ties into a post about a week ago where someone pointed out the chunk of profit that Walmart keeps that could shave otherwise gone to wages and benefits, and the fact that its employees then turn to the government to make up the difference.
I think there are two competing philosophies in place. 1) A business should be able to keep everything it possibly can so far as the free market will allow and has no further obligation to its employees or society. The people (society/government) are then expected to make up the difference. This is the current system, or 2) it should deb the business’ responsibility to provide reasonable wages when the profits allow it to (though because of market competition, this is often done through a minimum wage law that require’s the business to do so).
On the flip side, even in the case of number 1, since the wealthy pay most of the taxes, this wage difference in the form of government assistance really is just paying Walmart employees out of their left pocket instead of their right.
To the other point, anyone with disposable income can become a “business owner” (i.e. you can have an IRA, 401K, own stocks, etc.). So the key is to try to be on that side of the wealth gap of the equation. As I’m sure you can attest, in many cases that just isn’t possible, most people aren’t doing nearly enough to be on that side of the fence.
What I’m saying is that we aren’t going to allow our standard of living to fall to that experienced by workers in the developing world. I say that because that’s not really the direction we’re heading in now. (For every article about the disappearing middle class, there’s a dozen responses that even poor people in America have refrigerators and running water.)
I don’t disagree with that but we are doing this thru what I consider to be “Bandaids”, credit spending and welfare spending.
What’s going to happen is what’s already happening: The American workforce will continue to increase its productivity, corporate America will continue to take a larger and larger share of that productivity
You keep saying this but have not offered up any examples of it. I just looked up several companies and their quarterly profit margins running from the early 80’s thru today. Some are more some are less, just as I would expect in any market. Companies like Ford have less of a profit margin today then they did in the early 90’s. I don’t have data going back to the 50’s and 60’s but my guess is that automotive had WAY larger margins then they they do today. Walmart have a slightly lower profit margin while Boeing is slightly higher then the early 90’s. I could not find any information that combined the average trend of profit margin for something like all the companies in the DOW but I suspect that overall the average profit margin is not all that different. I would expect to so some slight increase from the early 90’s, but if the data was available I would expect to see a decreases from the 50’s and 60’s.
The wealth and income gaps will continue to grow. As that goes on, more people will become dependent on government services, like subsidized health care, fewer people will contribute in the form of income taxes, and so on.
Seems to me you’re making a self fulfilling prophecy. “I won’t accept a lesser lifestyle so rather then work I will expect government subsidy”. By not working the wealth and income gap will of course widen.
While I do not disagree that your scenario is a possibility I disagree that it is the ONLY possible scenario. The lower income levels can accept a lower level of quality of life as would the middle class and much of the working class. We can do this without increased welfare and can for the most part even do so by DECREASING welfare. At some point this path leads to the equilibrium point I brought up earlier at which time all classes can start to see an increase in quality of life again. At this point however the entire world will be seeing this increase in quality of life rather then just western countries.
~Matt
One other part of the equation to keep in mind is that equilibrium works both ways (at least in the IT sector) 8 years ago the numbers I was given by HR were a ratio of 4 or 5 to 1 i.e. we could open 4 to 5 positions for the same cost as one position in the the US. Salaries have gone up a lot and that ratio is now considered closer to 2 to 1 given the cost of managing those outsourced teams in the same country.
By definition it goes both ways. While it’s possible for one side to continually lose or gain and the other side not change at all, that is rarely the case. Wages in China has been going up at a pretty significant rate. They are pretty quickly hitting walls as far as available labor and demand for labor is going up fast causing increased wages. There is already an evironmental movement taking hold over there which will be another point of upward pressure on costs. At some point, and like you I have seen cases of this already in manufacturing, it makes economical sense to keep the work here in the US.
~Matt
If profits are high enough to “Allow” higher wages then for the most part the company will be forced to pay higher wages. Walmart is a relatively low profit margin company, not only that but their profit margin is going down. There annual profit margin was 3.9% in 1985 and was 3.6% in 2013. It went up slightly thru the early 90’s and has been going down ever since. There are other companies, like the massive grocer Kroger, that runs from less to 1% profit to slightly over 1% profit. Both Kroger and Wal mart pay similar wages. So if walmart "decides to " or “Is forced to” pay wages that bring them down to Krogers profit margin doing the same to Kroger would cause them to be unprofitable.
If there was a reasonable argument that point to a correlation between wages, employee productivity and profit margins there may be a case for such an action. But as far as I can tell it is merely opinion and “Sour grapes” that companies are making “Huge profit” off of labor. It’s simply not supported by fact or the numbers.
To the other point, anyone with disposable income can become a “business owner”
America is one of the easiest countries in the world to become a business owner. Furthermore the law of marginal utility tells us that “The rich” are going to give up their money easier then any other group. Start a business, hire people, and take the “Rich peoples” money. It’s a simple equation that works time and time again, but it takes a work.
IOW if you REALLY think you’re getting screwed as labor and REALLY think it’s easy to screw labor…then attempt to become the “Screwer” instead of the “Screwee”. In reality however it isn’t easy and most people can’t do it and even more to the point few if any companies are ever in a position to take advantage of labor in the way they are accused of daily. It just doesn’t work that way.
~Matt
An interesting little analysis that may be relevant: http://www.nytimes.com/2014/12/11/upshot/employers-will-have-to-raise-wages-they-just-dont-know-it-yet.html
The ratio of openings to hiring is at an all time high, but wages aren’t increasing as economic theory says they should.
Here’s a theory to try to make sense of the disconnect: During the recession, employers got spoiled. When unemployment was near 10 percent, talented workers were lined up outside their door. The workers they did have were terrified of losing their jobs. If you put out word that you had an opening, you could fill the job almost instantly. That’s why the ratio of job openings to hires fell so low in 2009.
As the economy has gotten better the last five years, employers have had more and more job openings, but have been sorely reluctant to accept that it’s not 2009 anymore in terms of what workers they can hire and at what wage.
According to Matt and the free-market champions, this shouldn’t be: competing companies will just raise benefits/wages to attract the best candidates. And yet…
** **I think it’s much more likely that we’ll simply expand the number of people dependent on government assistance to maintain a quality of life closer to that which we’re accustomed to in the developed world, and more and more people will become more and more entrenched in dependency.) Do you find that an acceptable situation? Or do you see it as simply inevitable?
Are you saying that Walmart is costing the government money?
The ratio of openings to hiring is at an all time high, but wages aren’t increasing as economic theory says they should.
According to Matt and the free-market champions, this shouldn’t be: competing companies will just raise benefits/wages to attract the best candidates. And yet…
Actually no this is making my point. Companies will not hire if the cost of the wages push the cost of the job over the point where a profit can be made off it. If a company has a job that they can pay 10$ for and make a profit but will not be able to sell the product by paying 11$ an hour they will offer 10$ an hour, not 11$. If the people looking for work will not work for 10$ obviously you have a situation where there will continue to be more and more job openings at 10$.
A company if given a choice of taking a loss or lowering overall revenue by not selling as much product will more often then not take the less revenue.
I’m not sure what “Free market champions” you’ve been talking to that said “Companies will always fill jobs regardless of the cost of the labor to fill those jobs”. That would simply be a silly statement.
~Matt