Saturday, December 10, 2016

When You Make It Expensive To Employ People.....

Labor is a commodity like anything else.   If you raise the price of a commodity, people buy less of it, or seek out alternatives.

Note:  I wrote this posting a few months back, but did not finish editing it until today.  --Bob.

One reason our economy has done as well as it has over the last eight years (and it has done very well, thank you, despite what Trump and Sanders say) is that our cost of labor has gone down.   People decry "income inequality" (as if how much someone else makes is relevant to your own personal happiness) and others whine that "real wages" have not gone up in decades.

But the reality is, since wages have indeed stagnated, and in some instances gone down, people are again hiring in this country, at least in low-cost wage States, mostly in the South.    Numerous reports back up this claim - that America is now almost on a par with the cost of manufacturing in China (particularly when you factor in transportation costs) and that by 2020, we will again be the world's largest manufacturing country (up from #3 a few years ago, and #2 today).

The key is, of course, that most of this expansion in manufacturing is occurring in places where wages and taxes are low and regulations are fewer.   Nissan is building trucks in Canton, Mississippi, paying as little as $16 an hour or so, for part-time help.   Meanwhile, in Detroit, Union workers make twice as much, and cost four times as much with benefits and restrictive work rules.   The Big-3 automakers cannot compete with non-union workforce companies, except in the highly profitable SUV and Truck markets, where huge mark-ups on these empty steel boxes allow for padded wages.

The decline of unionism is one reason America is so competitive today.  In fact, on a world stage, our economy is the strongest.   Forget what Donald Trump says about China - their economy is in the toilet and has been on the decline for a number of years, while their national debt - as well as personal debts - continue to climb.  Europe continues to struggle to recover from the 2009 recession as well as deal with its various debt crises and political crises - which threaten to tear apart the fragile union.

But even given all that, things have changed in America, and not all for the better.   Yes, unemployment is down, but wages are, too. (UPDATE:  They are finally starting to climb again as unemployment hits a low of 4.3%).  The labor market, like so much else, has sought and found equilibrium.   The old days where a union worker could expect a huge paycheck, guaranteed lifetime employment, and a cushy pension in retirement - while doing substandard work - are disappearing fast.

Government unions are the last bastion of this cradle-to-grave protection, and they are under attack in many States, as property owners are handed the hefty bills.   We talk a lot about "income inequality" in this county, but no one bothers to ask why a schoolteacher in New York should be making $100,000 a year for working only nine months, while the median household income in America is half that amount.   Talk about your 1%'ers!  They aren't all on Wall Street - they are also on Main Street, at the local government office or school.

The rest of us don't have it so swell.    Pensions are gone, now replaced by a 401(k) or IRA.   And if you don't have the discipline to save, you are going to be in a world of woe by the time you retire.  And more and more companies are finding that it is a lot cheaper to "farm out" work to contractors than to hire people within.   And being an independent contractor is even more fun that having a 401(k).  Because in addition to funding your own retirement, you have to pay an 18% self-employment tax AND pay for your own health care!    The old days of Corporate Socialism in America are long gone.

When I went to work for General Motors in 1978, we made pretty much every single part of a car except the tires and the gasoline.   Sloan's "Vertical Integration" model meant that we made everything from spark plugs to batteries to radios to turn signals.   The old model of manufacturing was to integrate and consolidate and thus lower overall manufacturing costs - and insure a steady supply of parts as well.

Today, the Big-3 have shed their parts divisions and are now more car assemblers than car makers.   They still make engines, to be sure, and they stamp out body panels (sometimes).  But most of the rest of the car is bought as sub-assemblies from captive suppliers as prices that are strongly negotiated.  This is the Japanese model of Keritsu suppliers - companies that are beholden to you as their sole customer, and as such, can be "crammed down" on price.

Back in the 1990's I read a story about a fellow who made aftermarket bumpers for Toyota trucks.   He was contacted by Toyota to make rear bumpers for their trucks, in order to increase US-made content (at the time, many trucks were imported with no beds or bumpers, which were added on in the US to avoid the 20% "chicken tax" duty on imported light trucks).   He jumped at the chance to have such a large contract and a large customer, but things unwound rather quickly.

Toyota sent engineers to his shop, and they reorganized his machine shop into a factory - so that materials came in one end, and bumpers went out the other.   The owner quickly realized that his aftermarket accessories business would be a hindrance, so he dropped that.   And he had to borrow a lot of money to tool up for this big Toyota contract.   And before long, his new factory was humming along, making bumpers in mass quantities and the checks started coming in.   But a funny thing, with the new debt to service and the new employees to hire, he was not making the big money he thought he would.  And when it came time to renegotiate the contract, Toyota wanted the price cut - and he had to take it or go bust.  That is how the game is played with captive suppliers.

On a personal level, the same is true with contractors.   Wall Street rewards companies for cutting "head count" and thus cutting overhead.   If you can outsource your labor to a part-time contractor, it can be good for business in a number of ways.   First, the head count goes down, so your stock price goes up and your stock options are worth a lot more.

Second, your actual costs may go down.   An in-house attorney, for example, may sound like a bargain, as his salary is less than the "billable hours" you pay an outside counsel.   But there are real overhead costs involved with having employees - benefits, taxes, office space, and so on.   And motivating employees to work requires someone to monitor their work and kick them in the butt.   The outside contractor doesn't get paid if he doesn't work, so he is motivated by the wolves at his door.  And you can hire him when you need him, and then let him go when you don't.

So what does this have to do with employment?
There is a lot of talk (and action) about raising the minimum wage.   A lot of this is based again on what other people are making and also this idea that a minimum wage job should "support a family of four" on a single income.

The problem is, when you make labor more expensive, like any other commodity, people will buy less of it, or use it more wisely.   If you demand more money for work, expect them to make you work harder for the money - or have better job skills.

And it goes without saying that if your labor costs more, automation looks more attractive - as does outsourcing, contracting, and the like.

Fast food at first seems like a place where labor is pretty fixed.   But outsourcing is already being used in some high-labor cost areas.  In Hawaii, they use people in Texas and California to take orders in the drive-through because the cost of labor in Hawaii is so high.   Of course, you could even outsource this further to India, but odds are, the garbled messages to Indian call centers would result in garbled orders.   But it is possible to move work electronically (or physically) to places where labor is cheaper.

Automation is another effect.  A few years back, we wen to France and I wanted to order some pomme frites, which are large slices of potatoes, fried, to accompany our pizza (yes, I know, French cuisine!).   They used Kiosks in the store to place orders, instead of servers.   And it was a lot more accurate, faster (no standing in line) and when the order was done, they brought it to your table.

Already, many fast-food outlets in America are promising to bring these kiosks to America.  It may be less personal, but it beats standing in line behind the guy who says, "I'll have an, uhhh..... uhhhh.... uhhhh......" for ten minutes.

The back of the house is not immune, and in fact, ripe for automation.   French fries, for example, are already made in vending machines.  I tried one nearly 30 years ago when I was in Law School.  The technology is there already, it just isn't cost-effective yet because labor rates are so attractive.

People make things better than machines?  I think not.

Making burgers?   How many times have you been to a fast-food place and saw the marvelous photo of the delectable burger on the menu only to find a mashed-up nightmare after you order it?  This sort of thing is ripe for automation.  And hey, lets not even talk about the decreased risk of food-borne illness.  Chipolte should be jumping all over this.

Of course, a full-fledged fast-food vending kiosk maybe years away - or would it ?

The Carl's Jr. Automated fast food kiosk of the future - brought to you by our new Secretary of Labor!

Raising wages sounds like a great deal, until you realize that it raises the cost of making things and selling things, which in turn means either prices are going to go up, or you are going to price yourself out of a job.

We went thought this in the 1970's with stagflation.   Wages rose so quickly and labor became so expensive that a lot of manufacturing plants closed and closed permanently in the 1980's and 1990's.   Most of those jobs are never coming back, ever, at least in high-cost union markets in the rust belt.

You can have high wages or you can have high employment.   You generally can't have both.


A reader writes:

"I read your article about the minimum wage hike and did some additional research on the 'remote call center drive thru' and came across this article. Seems as though the idea of kiosk ordering is "coming right up!"

P.S. I noticed that if you Google "McDonald's Kiosk", there is a SLEW of "newz articles" that would lead one to believe that the roll out of this is going to happen NOW...not yesterday, or as stores update, but NOW and it's because it's because of the min wage fight. And of course, the folks at McD's have said no such thing. I hate that it is so tough to find out ACTUAL's quite annoying and frankly I am usually too damn lazy to dig too deep. I guess it's good I ignore most of the "newz" out there anyway!"
The problem with monetized blogs and news sites is that you get paid based on hits, not based on truth or quality.   In a recent NYT article, they profiled a teenager in Macedonia who makes tens of thousands of dollars a month writing outlandish articles about Trump (pro-Trump) and Clinton (anti-Clinton).   The Trump supporters click on them and believe them, and he makes money on each click.

Fake news sells.   And a topical story to sell is that Kiosks will be here tomorrow, when in fact, it may take months or years for fast-food automation to be implemented.   But it will be implemented, and a higher minimum wage WILL speed the process.

Kiosks like the ones I saw in France several years ago.

The kiosks are all over Europe where labor is more expensive.  I found them easier to deal with than the real cashier.
Not that I go to a fast food place more than once a month.   Frankly, I find the experience there depressing and the food overpriced.  But when traveling, sometimes they are convenient, if you haven't planned ahead, which is why we like to travel by RV - you have your kitchen with you.
I think they intentionally make the menus hard to read, so when you get to the head of the line you order the expensive "meal" that is prominently displayed, instead of the cheaper items off to the side.
Suddenly your "Cheap" fast food meal is like $8 and you wonder how that happened.
In other news, McDonald's is now selling canned ground coffee ("McCafe") in WalMart.   I though this was interesting that they are expanding the brand to grocery stores.
What's next - frozen burgers and breakfast entrees in the frozen food aisle?
It would be smart marketing.