What do early retirement buyouts at General Motors, IBM and Progress Energy (Raleigh News & Observer, 4/20/05) have in common with the state of North Carolina’s temporary worker tempest, and the 35-hour European work week? All are cost-cutting measures, and the result of past compensation packages too high for current market conditions.
The state of North Carolina employs between 110,000 and 120,000 workers, not counting its teachers. Temporary workers have tried to claim that the state should offer them the same benefits reserved for permanent employees. In North Carolina, a temporary worker is defined as one employed for fewer than 12 consecutive months.
Temporary workers save the state hundreds of thousands of dollars annually. They do not receive the pensions, paid vacations, and other benefits to which permanent employees are entitled under the NC Administrative Code. By rotating temp workers off the payroll for one month out of the year, North Carolina avoids the cost of these perks. It’s a controversial policy, but one that recent court rulings have upheld.
What is not controversial is the fact that workers, especially full-time workers with benefits, cost employers much more than their money wage. Health, unemployment, retirement, vacation, and other items represent a valuable and expensive form of compensation, as would be immediately apparent if they were all purchased out of workers’ pockets.
A number of high profile U.S. firms are dealing with shrinking revenues, and have recently taken to cutting benefits, or to trying to buy out workers with early retirement packages, in order to reduce costs. Among these are Progress Energy, IBM, General Motors, and Ford. All are facing intense competition, declining sales and profits, and rising health care costs, particularly among older workers and retirees. What now appear to be overly generous benefits have compounded the financial problems of each company. In response, each is assessing cost-cutting strategies, including cuts in their benefits packages. All are shrinking the number of employees on the payroll as well.
In a market, your total “worth” to the employer, in revenue-generating terms, must be at least equal to the value of your wages plus your non-wage perks. If you generate five additional pizzas per hour at a restaurant once you are employed, and they sell for $10 apiece, you generate $50 per hour in revenue for the employer. If production were costless, you could expect no more than $50 per hour in total compensation. In fact you will earn less, since the cost of all of the inputs must be covered by revenues. You also face a trade-off in the form of your payment: the greater your non-monetary benefits, the lower your money wage will be. If your boss provides housing for all of his firm’s employees, for example, their money wages will be lower than if he did not provide housing.
Why doesn’t everyone get benefits? Hourly wage employees often get no fringe benefits, like holidays and health care, for at least two reasons: 1) there are more substitutes for their labor in the market, so employers do not need to offer benefits to find workers, and 2) to the extent that the wage rate for hourly employees is not flexible—due to contracts or minimum wage laws—the employer cannot offer a lower money wage in exchange for other compensation. Cutting costs by laying off workers becomes the only viable option.
Union-negotiated wage rates in the automobile industry are an example of the kind of inflexibility that can threaten the survival of a firm. And in the name of preserving benefits and wage rates, some European nations have enacted laws that require long (and costly) lead times for notification of plant closings. Rather than preserving jobs, these laws have led to higher unemployment, a shorter workweek and lower incomes, as well as slower economic growth, in the countries that have adopted them (Wall Street Journal, 8/8/02).
No matter who the employer, the route to higher pay is still through greater productivity and higher product value. There’s still no way to increase wealth in society by raising the price of labor, or by spinning straw into gold.