Monday, July 1, 2013

Checklist for profitable business: quality product, solid management & marketing teams, and high unemployment

Image: Construction workers "lucky" enough to have the privilege to work for low wages (source)

It's no secret that unemployment is still very high.  There are still 3.1 job seekers for every one job opening.  And things are even "worse" for the construction industry, where there are 12 job seekers for every 1 job opening:

Indeed, construction workers have been especially hard hit by the Great Recession and "recovery."  Setting aside the problems with the measure, the overall unemployment rate is 7.6%; for construction workers, the unemployment rate is 13.2%, and topped out at over 27%.  Most of the drop in unemployment is not due to these workers finding construction jobs, but with huge numbers of workers giving up.  Whether these workers successfully found work in other employment sectors matters little to the point of this post (most didn't)--but the obvious fact remains that huge numbers of workers skilled in construction are ready and willing to work.  Again, with 12 construction job seekers for every one construction job opening--double that number if you count the workers who have given up looking for construction jobs--there is no question that we have more skilled construction workers available than we can possibly use.

So why did the construction lobby fight to bring in foreign construction workers?  Current law caps work visas for immigrant guest workers at 15,000; the construction lobby fought (and failed) to get that cap eliminated.  Why, when there are so many idle, unemployed construction workers ready and willing to work, would the construction lobby possibly want to bring in more?

The reason the construction industry wants more foreign guest workers is because high unemployment keeps wages low.  When unemployment is high and workers are desperate for work, businesses can pay workers less than they're worth.  "You want $30,000 per year, plus health insurance?  Why should I hire you when Bob is willing to work for $20,000 without benefits?"  High unemployment = low wages.  This is basic economics.

By contrast, when there are fewer than 1 job seekers for every 1 job opening, the situation is reversed.  Instead of workers fighting with each other to work for the lowest amount, employers must compete for scarce employees.  If only one worker is applying for two jobs, the employer that makes the best offer will get the worker; the other company will get no one.  "Why should I work for you?  You're offering me $30,000 plus health insurance, but ACME, Inc is offering me $40,000 plus health insurance and a 3% contribution to my 401(k).  Unless you make me a better offer, I'm going to work for ACME."  Low unemployment = higher wages.  Again, basic economics.

This isn't theoretical.  It plays out in the real world.  It's no coincidence that today's high unemployment corresponds with record high corporate profits and record low wages and salaries.  One person's salary is another person's profit.  And, the data show that, the lower the unemployment, the higher the salaries of workers:

And it's not because people with graduate degrees are worth more than people without graduate degrees, simply because they are more skilled.  That's nonsense.  I have a graduate degree, but I don't know how to build a house.  If there were 12 unemployed chemical engineers for every job opening in chemical engineering, their wages would get bargained down--way down.  The fact that so many people are afraid of math means that there very few people actually study chemical engineering in college, and the number of chemical engineers is thus always very low.  This gives chemical engineers the ability to bargain their wages up, since there are so few of them relative to the number of job openings for chemical engineers; in other words, chemical engineers are at full employment.  Indeed, the very idea that people are paid what their skills are worth is absurd:

Even in their highest paid major, electrical engineering, blacks earn $12,000 less a year on average than Asians and $22,000 less than whites with the same major...Female chemical engineering majors earn on average $20,000 less a year than male counterparts.

Same school, same degree, same skills.  Yet white males get paid more.  People are not paid based on their skills.  That is fantasy.

Full employment, or the situation where there is a ratio of exactly 1 job seeker for every 1 job opening is a reasonable compromise between employers and workers.  But, again, the US is currently at 3.1:1.  Obviously, training unemployed construction workers to do other work will not help them get jobs, since the number of job seeker vastly exceeds the number of job openings in every sector of employment.  I will write in the future about the many other benefits of full employment (like lower crime), but if you can't wait, read this.

This is not to make a judgment about one group being right and another being wrong.  Business owners' (wrongly*) perceive that it is best interests to keep labor costs as low as possible.  Workers, obviously, want high wages.  The incentives are exactly opposite; that's not making a judgment, that's stating a fact.  What the construction lobbyists were doing was attempting to manipulate public policy to their benefit.  More guest workers = higher unemployment = lower wages for workers = lower labor costs = higher profits.  As the construction lobby made perfectly clear, unemployment is a goal of business lobbies.  Businesses do not want everyone to have a job, since they believe that full employment lowers profits.  A slack labor market, full of unemployed, desperate workers, is the goal of business.  The construction lobby might not want these visas now; however, one day, the construction industry may actually achieve full employment.  If that day comes, the construction lobby wants the tools to continue underpaying their workers--unlimited guest visas to create more job seekers than job openings.

Business groups, like the Chamber of Commerce, would have us be deferential to them as their members patriotically create jobs to Put America Back to Work.  But it's key to note that it is not their goal to create jobs for everyone.  Business groups believe that full employment is not profitable, so they don't want it.  Left to their own devices, businesses won't create full employment.  We need to fight for full employment policies because business have the incentives to pay workers as little as possible.  In this case, the racism and xenophobia of right wing Republicans overrode their deference to business interests, and Congress made the right decision for workers.  Congress usually doesn't make the right decision.

*It's worth noting that research argues against undercompensating workers; that is, undercompensated workers are unhappy workers, and unhappy workers are unproductive workers, and unproductive workers lead to lower profits.  Thus, trying to undercut employee wages might increase profits in the short term, but actually backfires in the long run.  Most business groups, like the Chamber of Commerce, ignore this research and thus (ironically) are fighting for policies that are bad for workers and bad for business.  All posts that discuss this idea will be given the tag "protecting businesses from themselves."

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