Wednesday, February 3, 2010

Labour pricing - don't score an own goal

One of the most amazing consequences of the recession over the last two years is that, for the first time, employees are willing to accept pay cuts, or even zero pay for periods of time, in order to retain their jobs. Labour has realised (the unpleasant truth) that just like any other factor of production, there is an equilibrium price. Go above it and business will be killed. Its much better to have low pay than no pay. High pay and constant increases are not an automatic entitlement.

This post is primarily for the developed economies where cost of labour is high. Because this has been accepted as a given, manufacturing has inexorably moved to the east, notably China. So the developed world has accepted, without challenge, that their costs will be high and therefore they can do nothing about jobs going away. Such a defeatist attitude is unbecoming of the great innovative cultures they are. Any cost, even labour cost, can , and should, be controlled to keep manufacturing jobs from going away. But how ? Here’s an unpalatable prescription.

Lets take a typical situation – the cost of a worker in a factory is say $ 25,000 per annum. The equivalent cost in a developing country is $ 2,500. Now that’s a huge gap – 90%. While there is no magic bullet, we can chip away at the difference.

Firstly, a significant portion of the cost in developed countries is the social costs that are imposed by the government. Generous pension rules. Unbelievable medical rights (for god's sake, artificial breast implants should not be an entitlement in any medical scheme). The US system of employer paying the medical insurance is a horrible way to drive labour costs up and ensure that manufacturing jobs keep going to China. Retain very basic social costs and remove everything else. Costs are down by 10%.

Employees must work longer hours. No 6 week holiday entitlement. Work five and a half days a week; maybe even six days. Work eight and half hours a day. Another 15% reduction.

Governments must provide an incentive for lower level manufacturing jobs in the form of tax concessions (argued in the previous post). Abolish investment related subsidies (the amount of pork in the US is unbelievable). Channel that money to tax breaks for the low end manufacturing jobs. Another 10% reduction.

Allow inflation to chip away another 10%. Wage inflation in developing countries will always be higher than wage inflation in developed countries. Aspirations rise everywhere – even in the poor world. And contrary to economic theory it will not be nullified by exchange rate movements. Keep wage inflation in developed countries to 0%. In 5 years, you’ve made up another 15%.

The employee should take charge of his destiny and guarantee a 5% productivity higher than in the low cost developing world. By working smarter; not necessarily harder. Write it into the employee contract. Another 5% is chipped away. Give up some “luxury perks” like swank canteen, gym, etc. 5% more goes. And finally exempt them from paying the union subscription. Another 5% gone.

That still leaves a 25 % differential. But that is safe. No company will ship jobs to another country for a mere 25% savings in labour costs. The additional costs of shipping, supervision, risk, etc will outweigh such a differential.

Does this all look like a horrible killjoy proposal ? Capitalist pig being anti labour ? A sweatshop ? For sure it would seem like that to the entrenched employee with a “safe” job. But stand on the outside. Ask the unemployed single mother struggling to find work – any work. Ask the person who’s on the street having been evicted from his house. Ask the guy who’s applied to 436 jobs and got deafening silence, not even the courtesy of a reject letter. You’ll get a very different perspective.

Is this politically saleable ? Absolutely not. But try introducing this with an undertaking that anybody who opts for this is guaranteed a job for the next 10 years. Purely optional. Only in new plants being set up afresh. Whoever wants to take this up can take it up, purely voluntarily.

Try this in El Centro, CA, the town with the highest unemployment in the US. Somehow, I think you’ll find enough people signing up to fill 5 factories.