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Saving Democracy: Why Wages Have Declined for 20 Years, Labor Needs Equal Role With Capital

(Saving Democracy Series:  this post focuses on what factors are causing labor to lose it rightful position as an equal partner with capital in the US economy and concludes with ideas on how to bring labor back into an equal role; from new institutions like a Federal Reserve for Labor, to corporate law reform, ending stock buybacks, and training with a powerful apprenticeship program)

Labor has been viewed as a cost for hundreds of years. Somehow the early accountants working for Middle Age Venetian families invented double entry accounting systems with debits and credits, These accountants called credited assets like money, land and equipment while labor was a debit labeled as an expense. Labor is viewed as an expense to this day because the owner-entrepreneur has to pay employees to work – in effect ‘renting labor’..  Workers have had the ‘cost’ yoke around their necks ever since.  Yet, are employees really a cost?  The staff are the ones doing the work, creating the product or service and solving the problems – money does not create the product or service only people do. CEOs are often heard to say that employees ‘are our most important asset’ but then treats them like second class citizens in making policies for the company, gaining a fair share of the profits or enjoying job hours flexibility. Today, Wall Street applauds wages being stagnant for the 80 % while profits go up while wealth accumulates for The Elite.

Over the past 20 years in particular, workers have seen their ‘economic position’ continue to deteriorate.  Labor sovereignty continues to decline on multiple fronts: wages, benefits, standard of living, job negotiating clout, choice of companies and the constant sword of Diogenes held over their job by automation.  For example over the past fifteen years wages for workers have been stagnating.  However, this declining wage trend is not new, it has been happening since the early 1980s, when President Reagan took office and ‘trickle down economics’ was promised as a way to give workers a fair share of the economic pie.  Workers have lost their wage share of business sector income ever since.

Sources: The Federal Reserve Bank – St. Louis, The Wall Street Journal, The Daily Shot – 5/3/19

Labor’s share of business sector income has dropped by 15 % since 1950.  While, this labor share statistic uses wage employment data and estimates for self- employment, some observers think the decline is largely due under estimates of the size of the ‘gig economy’.  However, separate wage data supports the declining wage trend:

Source: Global Technical Analysis – 5/3/19

When real wages calculated after inflation are allocated across all employed workers the decline is most apparent, a 34 % decrease since 1983.  The softening wage trend is not getting better, Bankrate surveyed 1,000 workers last year and found that only 27 % received a wage increase.

Why have wages continued to fall the past 50 plus years?  There are multiple factors combining to put workers at the lowest point of wage negotiating power in recent times.  Automation is one of the prime reasons for the loss in wage bargaining power.

Sources: FiveThirtyEight, The Federal Reserve, Bureau of Labor Statistics – 3/2016

Almost 5 million manufacturing jobs have disappeared since 2000, yet over the past 9 years factories have been coming back to the US by increasing employment by 5 %, but with far fewer workers. Yet, the US is taking the No. 2 position in worldwide manufacturing output with a 20 % increase in output

The reduction of manufacturing jobs in the US, automation has been a key factor weakening the worker wage bargaining position. A recent Ball State University study found that over 88 % of lost manufacturing jobs were due to automation and productivity increases not offshoring.

Automation started decades ago, as IT applications deployed in offices and manufacturing plants in the 1970s and 80s displaced thousands of workers performing repetitive manual tasks such as data gathering and reporting, answering phone calls, editing and copying documents, sending and receiving status reports, manufacturing reporting and others that were easily automated by software.  By 1995, the Internet began to impact the workplace, networking software applications so that jobs once requiring local support or data could be performed overseas for far less.  In Silicon Valley, an entry level software engineer would be paid $65 – 75 @hr., while an engineer in India was paid $20 @hr. or less. Thus, most business processes for ‘non-core’ functions like accounting, IT, customer support and benefits processing were moved offshore to reduce costs by 50 – 75 %.

In addition, major corporations have been outsourcing non-core services to US contracting companies to the detriment of worker’s pay security or benefits.  For example, in Silicon Valley starting in the 1980s until present – many core IT functions were outsourced with ‘facilities management’ agreements, where IT workers are fired, and rehired by outsourcing companies at 30 – 40 % less in salary with no benefits or health insurance. The workers were faced with no good choice – look for another job or take a pay and benefits cut for the job they had before.  In the Bay Area,  H1-B visas are often used to keep wages low by offering a worker from India 40 % of the local prevailing wage for a software engineer. The present GOP Administration has significantly reduced H1-B visas by a ratio 1 accepted of every 4 applications the lowest rate in 10 years.

Automation investments continue as software firms develop applications that automate many business activities previously thought to be difficult to automate:

Source: McKinsey Global Institute – 2/28/17

Jobs requiring skills from sensory perception fine motor activity or navigation are going to be automated over the next 30 – 50 years. All this investment in automation results in less competition for employers to find employees to do the work they need – a machine will do it.  The machine shows up on time, requires no vacation, is not absent, and does not sue the company for management miscues.  Plus, the added benefit is in well implemented automation projects costs are driven down, profits up so executives see their compensation increase.

Corporate Oligopoly

Another way corporations limit worker job options is by merging with other companies and then laying off workers in the newly combined firm.  Since 1997 the average market share for the top four firms in most of 893 industry sectors has increased from 26 % to 34 %.  For a tenth of these sectors where the top four firms have 33 % to 66 % market share their revenues have increased by 37 %!

Sources: Census Bureau, The Economist – 3/2016

The antitrust section of the Department of Justice has been asleep the past two decades. In the airline industry, there are now 4 airlines that own 80 % of the business.  In finance, just 5 banks have   50 % of $15 trillion in total assets. In the information search sector – the top 4 companies have 98.5 % of the search industry market. The wireless communications industry is dominated by the top 4 companies control 94.7 % of the market between them – Verizon, AT &T, Sprint and T-Mobile. In the tire manufacturing sector, the 4 top firms dominate the US market with a total market share of 90.1 %.  In 2012, entertainment, media and distribution markets were concentrated in 6 conglomerates with a total of 90 % market share. In 1983, 90 % of entertainment and related markets was distributed over 50 corporations, this chart sho concentration in the fastest growing streaming markets:

Sources: The Wall Street Journal, The Daily Shot – 4/22/19

The advertising industry has consolidated into a two Internet behemoths – Google (Alphabet) has nearly 50 % market share and Facebook with 16 %:

Caption: Bloomberg, Zenith Media, The Wall Street Journal, The Daily Shot – 9/25/17

From 1997 to 2017, the number of publicly listed corporations has declined by 50 % overall.  Fewer corporations for job candidates translates into fewer corporations offering good paying jobs with high quality benefits. Plus, an analysis of corporate concentration in the five year period of 2007  to 2012  in the services sector, found that where corporations control markets and reduce the number of workers to support sales wages are likely to decline.

Sources: The Wall Street Journal, The Daily Shot – 6/27/17
Sources: David Autor, Professor oF Economics, MIT et al, The Wall Street Journal, The Daily Shot – 7/23/19

Gig Economy

The ‘gig economy’ of freelancing and independent contractors has ballooned to about one-third of our workforce or 56 million workers in 2016 according to the McKinsey Global Institute.  A survey by Gallup indicates the types of gig jobs; full-time gig job, part-time gig job, two part-time gig jobs, one traditional job and one gig, or where the first job is a gig and the second job is a traditional job for 36 % of the the total workforce:

Sources: Gallup, The Wall Street Journal, The Daily Shot – 9/5/19

Workers in the bottom 80 % in income have seen their wages actually decline over the past 10 years. So, it is no surprise middle class workers need to hold at least two jobs to maintain their standard of living.  The number of workers holding multiple jobs has skyrocketed in the past few years to the highest level since 2008 (note the recessions at the peaks of multiple jobs).

Sources: Deutsche Ban, The Wall Street Journal, The Daily Shot – 9/5/19

When major corporations experience a slowdown in sales, as has occurred in the last quarter, temporary and gig workers are the first to be laid off or see their contracts cut back along with rates.

The growth of ‘shared economy’ companies like Uber, Lyft, Lime, Airbnb, VRBO and many others have provided these gig workers new flexible income opportunities without the financial safety net of traditional employer jobs.  Gig economy workers often have limited or no access to worker’s compensation, unemployment insurance, 401K retirement plans, disability insurance or health insurance. Independent workers are required to pay both the worker and company portion of Social Security taxes and worker portion of Medicare each year on their income. In the Gig Economy, 33 % of our national workforce is not organized into a union or any bargaining unit. These contract workers are at the mercy of corporations or businesses that set the terms of a work contract, and if there is a problem they quickly find another contractor with no obligation to the contract worker. Uber, and Lyft dominate the ride sharing market, pushing out taxi cab firms, car companies and shuttle businesses – many with full time employees including benefits.  While the cost of rides maybe going down for the passenger, workers are seeing their wages held steady or reduced (Uber reduced driver share of fares by 20 % a year ago) with estimates of an hourly wage ranging between $8.55 to $10.00 per/hr by Stanford researcher, Stephen Zoepf. Drivers receive no compensation for gas costs, auto depreciation, car insurance, Medicare and Social Security – paying both personal and self employment, car repairs and or financial protections. Uber and Lyft receive fees ranging from 25% to 39 % of fare totals. Drivers do receive tips. Financial protection for gig economy workers is in the infant stage, where companies are holding off any meaningful changes until class action suits are brought against them. Last March, Uber settled a suit filed by drivers from California and Massachusetts to be declared employees. The suit settled for $20 million to the drivers, without changing their employment status which stays independent yet they will be given more transparency on driver deactivation and a chance to purchase shares in Uber’s  coming IPO.

Source: Marketwatch.com

Uber’s public stock offering demonstrates the gross inequality of income and wealth, as the drivers are providing the service, yet only a few drivers were offered stock options and the founders made billions of dollars from the public offering. The IPO is a good microcosm of how the Silicon Valley economy works rewarding a few while others providing the services or making products gain very little compensation in comparison.

Productivity

In 2018, Goldman Sachs estimates S & P 500 corporations will spend over $1 trillion in stock buybacks, and they forecast a similar figure for 2019.  None of these funds are being invested in the business to develop new technology, processes, training or systems to increase productivity or cut costs. Business executives are using stock buybacks to goose the price of their stock artificially adding to their compensation packages and the stock returns of shareholders most of which are in the top 1 % in income. Essentially, management is robbing workers of increases in future wages due to the nearsighted allocation of funds to take care of them themselves and pander to the wealthy.

When productivity is anemic, offering wage increases to workers cuts into profits.  Executives are compensated well based on hitting profit targets, so wage increases are not going to happen other than low inflation level 1 – 2 % increases. Over the past nineteen years manufacturing productivity has dropped from 8.0 % to 1.0 % this past year. 

Source: Bureau of Labor Statistics – 5/2/19

Most of our economy is services based, and productivity improvements in the services sector have been slow in coming compared to the goods based sector. For example in social assistance, education, and healthcare there has actually been a reduction in productivity by about 9% since the 1980s.  Plus, hiring has centered on our services sectors so productivity increases are likely to be limited into the future. Our fastest growing sectors in the economy are among the least productive.  Artificial intelligence and software services may change this trend, but the results are still to be seen.

Sources: Brookings Institution, The Wall Street Journal – 10/30/16

Job changes are the lowest in the least productive services sectors, indicating work to be done to automate or implement productivity systems in these services sectors.

Sources: The Brookings Institution, The Wall Street Journal – 10/30/16

Executive Pay

Today, executive compensation at S & P 500 corporations is on average 300 times the average pay of their workers! Senior management enjoys a combination of high salaries, executive healthcare, house low cost loans, stock options and bonuses for achieving earnings targets (hyped by stock buybacks).  In 1975 CEO pay to mean employee pay was 25:1, in 1995 112: 1 and in 2017 312:1.

Sources: Adam Grant, Professor at Wharton, Compustat, Bureau of Labor Statistics – 9/27/18

Note the ratio of CEO to worker pay soars in the 1990s as a result of the the de-regulation, trickle-down and stock buyback allowance policy of the Reagan – Bush administrations. Extreme executive compensation is taking wages from workers who would otherwise receive their fair share wage. Corporations have committed over $1 trillion to stock buybacks, according to Goldman Sachs in 2018 which only go to increase their stock compensation plans and the top 1 % who own most stocks.  That trillion dollars could be better allocated to increasing worker wages so the economy works for the 80 % in income.

Worker Compensation

One aspect of worker compensation that has increased by 12 % since 2006 is total worker compensation in the form of benefits.  While wages have increased by just 4 % in the same period.  Paid leave, health and other benefits have grown faster than wages, except in a few months. Wages as a percentage of total compensation have dropped from 70 % in 2006 to 68.3 % in 2017.

Sources: Labor Department, The Wall Street Journal – 6/9/19

The health component is somewhat misleading, while corporations have seen increased costs for medical coverage, they have reduced those costs by moving the majority of cost increases over to employees.  Corporations have done this by increasing the deductibles covered, reducing the number of plans and increasing premiums.  Worker households are caught in a cash squeeze by having to pay more for the health care coverage they had previously while corporations are holding their costs in line with inflation or slightly more.

Federal minimum wage laws are not keeping up even with inflation. Some states are making up the difference, by requiring higher minimum wages than the federal minimum wage (dark blue, blue and light blue).  Other states offer the same minimum wage (yellow) and yet in the South many states don’t have any (dark grey) wage minimum laws with others (light grey) below federal minimum wage rates like Georgia and Wyoming. Note many foreign car manufacturers have deployed plants in no minimum wage states like Tennessee, Alabama and South Carolina.

Sources: National Conference of State Legislators, Bloomberg, Quick Take – 2018

Job Market Automation

LinkedIn was designed for corporate recruiters with the features and services they wanted to speed the recruiting process.  The edge to recruiters is obvious in the design of the service. For example job seekers cannot have multiple resumes or experience sets styled toward different jobs.  Unless the candidate – user is adept at settings updates to profiles are immediately sent out to all people in their network.  Recruiters have dashboards with filtered candidate lists around search preferences and locations.  The majority of LinkedIn’s revenue is from the corporate recruiting market – candidates are promoted to meet the needs of recruiters.  The use of LinkedIn, Monster, Indeed and other Internet job search services create and sustain a powerful recruiting edge for corporations.  Businesses can identify hundreds of high quality resumes and candidates quickly from all over the world in just a few hours or less. 

Source: Zety.com – 4/7/19

Resume scanning programs (recruiting bots)  further refine the candidate list, filtering content by keywords, phrases or other text targets.  Candidates are left with the challenge of figuring out what keyword ‘hits’ the bot is looking for and entering them into their resume so their resume will have the most ‘hits’ and rise to the top of the list of 250 plus candidates. Job seeking workers try to promote their job skills and experience with workers via social media sites, but are caught between being too public in their search with their boss finding out, or tipping off other candidates to the job they are seeking. Employers use their vast recruiting power in salary negotiations (‘we can always go to plenty of other qualified candidates’) and even after hiring keep all those candidate resumes online to fill the position if the new worker does not meet expectations. Only executives get promoted by an executive recruiter paid by corporate HR departments for find the right executive for an open position, once again the executives get a powerful edge over all other workers.

HR departments often hide behind Internet screens, offer no phone contact numbers and provide few ways for candidates to follow up with key staff.  Often, the trend now is to interview a candidate and not get back to them after the interview if they aren’t interested – sending a de facto message of ‘if we were interested we would send you a message or call’. Without an inside contact, a candidate is left to be a cog in the corporate recruiting machine.

Unions

When the manufacturing sector had the majority of American jobs, union power in representing employees was paramount. Unions are still a key bargaining entity for public employees, nurses and teachers. U

Fifty years ago 33 % of all US workers were members of a union, by 2015 membership had declined to just 10 % – a greater than 66 % decline.  The decline was quite pronounced in ‘right to work’ states in many in inland regions and the South:

Source: NPR – 2/23/19 Percentage of Workers – in Unions 2014

Unions played a crucial role in working to raise wages, benefits and ensure that people worked in safe conditions. Due to automation and offshoring the manufacturing sector has lost millions of jobs, thus unions and their role will need to evolve to the new services technology based economy.

In summary, workers are faced with a daunting set of economic forces holding their wages down – diminished bargaining units, the juggernaut of automation, stock buybacks instead of wage increases, fewer jobs at merged corporations, temporary jobs in the gig economy, reduced productivity, exorbitant executive pay and corporate control of job markets.

To make our democracy work, labor needs take an equal place in our government, corporate and social structure with capital.  Democracy = capital + labor where capital and labor have an equal political, economic and societal position.

Next Steps:

Federal Reserve Bank of Labor – the Federal Reserve system of Governors represents the nation’s largest banks with the President appointing each Governor.  The system has worked well for the banking system to manage financial crisis’s  and interest rates.  The business community and national policy makers await a continuing stream of reports and the Beige book on the status of business throughout the 12 regions with baited breath. The Federal Reserve made up of 12 governors from regional banks, do not represent workers, or really have the tools, levers or policy role to solve labor problems. The Fed’s real mission is to ensure that banks stay viable and the financial system is sound. Yet, Congress charted the Fed with a dual role of keeping inflation in check and supporting full employment. Using the unemployment rate as an indicator of labor’s health is a mistake. The number does not include the millions of workers who have quit looking for work, those without the skills, or those possible workers who are suffering in the drug epidemic because of despair in part from lack of work. The miss match between the millions unemployed vs job openings is a huge challenge and needs to be undertaken by an organization lead by executives from labor focused organizations.

Source: The Wall Street Journal – October 18, 2018

Labor needs an equal organization to represent labor at the table with capital. The new organization would advocate, collect research, and make decisions to promote the welfare of workers, improve wages and lead efforts to fill U.S. job openings.  The mission of the Federal Reserve Bank of Labor (FRBL) is to ensure the United States has the most competitive, up to date skills in a labor force to fill all positions that US corporations have open. In short, the FRBL is in charge of the Labor Bank. The Federal Reserve of Labor would match the 12 regions of the Fed, would be composed of 12 Governors selected by the President from academia, corporate human resources, unions, government worker groups and worker rights group leaders to guide labor policy and programs for the country.  The Governors would meet monthly, setting minimum wage rates by state in the country, review the results of labor statistics, write a Lavender report on the status of labor in each region, with a focus on putting unemployed workers who are seeking work back into the labor force and target an increase in the national labor force participation rate.  The Governors establish interest rates and the size of allocated loans from a bank of $100 billion in labor development loans which are allocated to corporations, NGOs, Unions, universities and others to drive the development of the labor force. The Governors establish the Federal Minimum Severance rates by industry sector state, executive, manager and worker. A minimum severance rate is the proportion of salary received in severance for example 3 months salary.  The FRBL board drives research into issues like why so many workers are still unemployed even with the unemployment rate being at a 50 year low, and why wages have stagnated over the past 20 years. The FRBL is charged with upgrading our labor indicators to assist policymakers in what is really happening to our labor force by industry, job type, racial group. The Governors are chartered to establish a labor force set of goals that are updated by month to measure the results of labor force development, both qualitative and quantitative. Labor experts in the Fed would move to the FRBL, coordinate surveys and research with Census and Labor departments.  The Federal Bank of Labor Governors meet quarterly with the Fed Governors to coordinate capital and labor development plans and programs. Regional FRBL and Fed Governors meet monthly to coordinate regional programs.

In addition to building the FRBL these policy initiatives need to be implemented or similar:

  1. Place Workers on Boards – as Germany has so effectively setup, engaging management with required representation of workers on Boards, through Worker Councils or Unions if so voted by the majority of workers.
  2. End Outsourcing – corporations would pay 50 % tax on each job moved overseas making the move costly, encouraging corporations to move jobs to low cost or inland areas of the US, or innovation economic zones (special tax geographies) and to invest in worker training to receive training tax credits.
  3. End Low Cost H1-B Visas – the practice of importing inexpensive labor to drive down wages in US markets would be ended
  4. Focus Repatriated Funds on Labor – profits parked in banks overseas are invested in productivity programs, increasing wages of workers (not executives), reducing costs or innovation research. Stock buybacks or dividends would be prohibited
  5. End Stock buybacks – these funds are totally wasted, mislead investors on earnings reports and only serve to increase compensation for executives and shareholders. These funds are better allocated to increase worker wages or increase productivity so workers can receive higher wage increases
  6. Breakup Oligopolies – breakup market concentrations in key sectors: information technology, banks and financial services, health insurers, airlines, hospitals and clinics, entertainment, media and distribution and others as deemed in the public interest
  7. Balance Job Market Process– require companies over 100 employees to offer information on their website for contacts, phone numbers, job listings with identified contacts, and to let the candidate know the status of his consideration, and candidate introductions held monthly for F2F communication
  8. Balance Worker and Executive Pay– Empower Work Councils and labor representatives on Boards to approve all executive pay packages. Work Councils in industry sectors would meet and decide on executive to worker ratios of average salary to enable all companies to remain competitive within an industry yet require labor approval. End golden parachute packages by taxing 50 % of every dollar received above $1 million. Severance packages for workers would have to be in proportion to the highest executive package ie, executive receives a minimum of  X dollars in proportion to total salary then a worker receives the same portion with a minimum of 50 % of their yearly salary or the Federal Minimum Severance Rate whichever is greater
  9. Fund Worker Training related to Robots and Increase Wages – for each robot employed, the corporation would be required to offer training, skills development for the displaced worker to find a comparable job within the company or outside. Where automation software or technology is deployed 10 % of the realized cost benefit would be used to raise the wages of all workers in the company.  Tax deductions of up to a 50 % credit would be offered on the cost of training and development programs.  For individual workers, if they pay for career development training they would be able to deduct the full cost of their investment in themselves from their taxes.            
  10. Fund Education and Apprenticeship Programs – Representative Ro Khanna has introduced an idea to fund a 21st century Morrell (1862 Land Grant) Act that would grant to 50 rural and urban universities funds to establish a United States Technology Institute where students would gain technology skills needed in a technology based economy.  In addition, our country needs a stem winding apprenticeship program patterned after the German model to bring skills needed for today’s manufacturing without a college degree.  The program would be given the same prestige and recognition as college programs, companies would pay the same wages, benefits and compensation for skills achieved in this program as any college skills program.
  11. Pool Stock at Public Offering to Workers – all drivers at firms like Lyft and Uber, and workers at other new corporations should be able to receive compensation for their hard work in providing service or building a product. While, some key workers receive stock options with a strike price below the IPO price, we propose that all workers receive stock shares in a pool at the time of IPO, they can cash out or keep the stock then they receive a reward as well as founders (workers should not be forced to hold shares longer than management). Stock pool shares can be awarded based on service years, performance ratings or other recognition approach that is objective and fair to all workers. After all, isn’t it worth it to founders to build a workforce that is loyal and excited about the company, by letting go of even 10 % of their billion dollar stock reward or $100 million to workers?

GM: Case Study to End Share Buy Backs

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: GM Lordstown plant to be closed – gmauthority.com

Yesterday, GM announced a series of plant closings and layoffs of 15,000 workers in North America.  GM attributed the need to shift its focus to electric car development, trucks and SUVs that consumers were buying, as sedan sales are falling.  Actually, auto sales worldwide have been dropping for the past year.

Source: Bloomberg – 11/27/18

Jesse Colombo, analyst at Clarity Financial notes that while GM’s announcement focused on electric car development the plant shutdowns and layoffs really were driven by of slowing auto sales.  The auto market has been shifting rapidly with the development of driverless cars, ride sharing reducing the need to own a car, and urbanization causing policy makers to fund more public transit. The auto maker announced that it will end production of the Chevy Volt electric sedan with sales falling short of targets. GM has targeted gig economy drivers for ride sharing companies like Uber and Lyft by offering an on demand service for the Chevy Volt at $225 per week in Austin.  It is not clear what will happen with this on demand service marketing beta test with Volt production being halted.  GM has partnered with Lyft, and made a $500 million dollar investment in the ride sharing company 2 years ago.  Thus, GM has made some investments in key new markets and technologies, yet is behind in adjusting to sedan sales which fell by 11 % in third quarter.

At the same time the auto market is undergoing rapid change, GM executives have been taking care of themselves as a first priority.  Wolf Richter, editor of the Wolf Report blog reports that GM spent $13.9 billion in stock buy backs since 2014.

Sources: Wolf Richter, Wolfstreet.com, Y- Charts, Marketwatch – 11/27/18

GM stock purchases took shares off the market to reduce supply, while expecting stock demand would move the share price up.  However, as Richter notes GM share price has actually fallen 10 % in that four year period. So, much for boosting the price of shares to pad the executive stock compensation plan.  Instead of investing in new technologies, research, new plants, employee training, increasing wages and other key transition programs GM completely wasted $13.9 billion dollars.  Poor management judgement is now causing 15,000 workers to lose their jobs in the U.S. and Canada.  While we will not know over the last four years if good business investments would have prevented all the layoffs it is certain the economic damage to Midwest and Canadian communities could have been significantly mitigated.

Next Steps:

Goldman Sachs estimates that S & P 500 corporations will complete $1.0 trillion dollars in stock buybacks this year.  One trillion dollars will be wasted by U.S. corporations as productivity investments have lagged over the past 5 years, and average real wages have been stagnant for the 80 % in income since the Great Recession.  As the GM example demonstrates, besides hurting employee wages, making U.S. companies less competitive and inflating stock prices now workers are losing jobs due to executive mismanagement and myopia on stock price.

Prior to 1982, the Securities Act of 1934 held that stock buybacks were a form of ‘stock price manipulation’ and were not allowed by the SEC.  This policy was overturned by an E.F. Hutton executive, John Shad as SEC Chairman appointed by President Reagan.  He created a ‘safe harbor’ policy where corporations could purchase their own stock, only a certain times during the trading day, with disclosure quarterly and blackout periods prior to earnings reports. Corporations have used buy backs since then but stock buy backs took off in 2015 to $695 billion and almost doubled to $1 trillion for 2018.

We recommend an end to the stock buyback safe harbor provisions and a return to the pre-1982 policy, management in many corporations has lost their bearings on why the company exists – first priorities being workers, their families, customer communities, society and the nation not their own compensation plan. Making the corporation profitable and valuable to shareholders is a means to achieving our societal goals of a decent wage, quality housing, and the ability of families to support their children.  In October, we posted an analysis on how major corporations like Boeing, GE and American Airlines underfunded their pension plans while executing  billions of dollars in stock buy backs. Executives need to take responsibility for full funding of all pensions not wasting money on stock buy backs. It  is time with so many middle class and economic investment needs that corporations receive a direct SEC policy shift to end stock buy backs.

Truth Has Lost It’s Most Important Defender – POTUS

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: spjla.org

Just before Thanksgiving, the FBI briefed the president on what actually happened to Washington Post columnist Jama Khosshoggi, that the Crown Prince of Saudi Arabia had to know and give the order for his murder in the Saudi Turkish Consulate.

Instead of defending the constitutional right of freedom of speech and the press and those that work so diligently at revealing and publishing the truth – POTUS defended the brutal killing of Khosshogi.  In a wholly greedy, self-serving, money grabbing (as Dickens would put it) way he talked about how important Saudi oil was to the U.S and for the kingdom to keep buying U.S. arms – killing thousands of innocent Yemeni people along the way.

The Truth lost its most important defender today.  We all lost out to geo politics and power in its most naked way.  The message being sent by our President is: “as long as you keep paying us and buying our stuff you can kill anybody you want and we will look the other way, including journalists”.  Historians will look back on this event as the low point for Truth in this country and the defense of the Press.

Our founding  fathers knew that a strong press was crucial to keep government in check from overreaching with its power over the people.  Jefferson and Madison believed in the American experiment that a well-informed citizenry will in the end make wise decisions about who and how they should be governed.

This president with all his demagoguery, scapegoating, bullying and no respect for the truth has taken the moral level of our country to a new low – in our eyes and the eyes of the world. He passed the 5,000 mark in falsehoods, misleading statements and just plain lies as recorded by the Washington Post this past September.  He has actually increased the number of falsehoods as he was campaigning for candidates he backed to an average of 32 per day from 8 per day up to his 601st day in office.

Journalists are under attack around the world, in the first 6 months of 2018 there has been 47 journalists killed worldwide almost the same number as for all of 2017.

Source: Statista – 2018

With nearly double the number of deaths through June 2018 journalists have a target on their backs.  Our POTUS did not help the situation by sending the message that dictators can kill journalists and there is no consequence.  When worldwide we a renewed focus on the truth, instead we are giving a green light to the creation of lie after lie.

Our national leaders need to be defending journalists throughout the world and in the U.S in particular because they are the investigators, researchers and messengers of truth.  Truth is the fresh air of democracy.  Our democracy cannot survive as a representative government when the truth and those who find and express the truth are under attack.

Congress and our national leaders need to take action to show the Saudi government that we want a relationship with the nation, not their present brutal leader, and the Saudi people.  We must defend the Truth, Liberty and Freedom wherever it is under attack in the world.

Wall Street Expects A Cash Return, Leaving Employees Out

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Photo: wikipedia.org

Today, employees don’t share in the profits or success financially the way they did the past. Forty years ago, Sears offered their sales staff commissions, bonuses and retirement plans enough for many of them to retire on $1 million in today’s equivalent dollars. Amazon recently announced raising all workers to $15 @hr, yet they are eliminating stock and bonus plans.  Hourly staff will be left with little for retirement except what little they can save.

What is driving management to not share company financial success with employees, or increase investments in productivity which would support a raise in wages?  One factor is Wall Street expectations of corporate management to keep the cash machine cranking full speed.

Sources: The Daily Shot, The Wall Street Journal – 10/25/18

Companies that invested in capital equipment to increase productivity or R & D to innovate were penalized by Wall Street investors driving their stock price down.  Note that on the lower chart the relative performance of investment focused on capex companies versus cash return in buybacks and dividends is 6 % less and has been falling since a year ago. Executives quite often receive as much as 80 % of their compensation in stock options based on stock performance and earnings targets.  Spending money on expenses by increasing wages, capital equipment purchases or innovative research reduces profits and does not provide more funding for stock purchases to drive the stock price up.

Next Steps:

Our post this past Labor Day notes how Wall Street wields power over the economy, and drives executive decisions on allocation of resources.

Wall Street, the citadel of capital,  wields supreme power focused on profit throughout our economy and control of our government. Corporations pander to financial leaders with ever higher profits manipulated by stock buybacks juicing the value of share prices. Management ensures investors are pleased with financial results using loose financial gimmicks and laying on record debt. While workers have seen their wages stagnate for 30 years since the 1980s.

Yet, Wall Street is beginning to change with major leaders beginning to recognize the need to invest in corporations that take social responsibility and worker value as core principles.

We need to require corporations to report on how they are building employees as assets and worker contribution to increasing company value.  The next step is for Wall Street to recognize social responsibility in their investments as Blackrock, CEO Larry Fink, has in a letter to CEOs of companies in their portfolio that he will be looking beyond profit, for implementation of policies by management in sustainability and worker advancement.

Harry Truman had the right perspective:

Our most productive asset is our labor force.”

Housing Has Not Recovered From the Great Recession

Image: 15146affordablehousing.weebly.com

As a percentage of GDP housing has not recovered from 2008.  Particularly, in two key categories: (1)  Furniture, Repairs & Maintenance and (2) Construction.  Additionally we know that appliance sales have been lagging as well due to tariffs and price versus worker wages being stagnant.

Sources: BEA, John Burns Real Estate, The Wall Street Journal, The Daily Shot – 10/18/18

Housing has not recovered from the Great Recession downturn from sub-prime mortgages and loose lending practices.  As part of the recovery, banks were made whole with billions of TARP funds, but homeowners who tried to write down their principal loss on their homes to reduce mortgage payments were not allowed in court.  Banks paid a small pittance of $50 million in homeowner relief that was distributed in a hazard manner.  Millions of homeowners lost their homes and more importantly lost their equity.  They could not replace their homes when the economy turned around, they had to take ‘make do’ jobs when they did finally find a job and are now left with little wealth to retire on except for Social Security.

Young prospective home buyers face a daunting affordability crisis as the inventory of affordable homes is low as builders focus on wealthy buyers, who buy high margin homes.

Sources: Scotiabank Economics, NAR, Haver Analytics, The Wall Street Journal, The Daily Shot – 10/17/18

In all regions of the country affordability continues to fall after reaching a peak in 2012.  Mortgage rates are at the highest level since the Great Recession, the inventory of middle class housing continues to decline and the commitment to homeownership is waning.  We hear more and more about how ‘renting is really ok’ – for who?  The wealthy landlords who continue to raise rents while raking in the cash.  What about families who want yards for their kids to play in, or to gain ‘sweat equity’ by upgrading the home they live in or landscaping the yard.  It is clear just looking at most neighborhood which homes are owned and maintained and which ones are rentals owned by an off premise landlord.

Next Steps:

Dropping the national commitment to home ownership is not the solution to the problem.  We need to ensure that the 80 % who do the heavy lifting in the economy can afford to buy a home on their incomes.  Corporations need to be increasing wages for workers at least as fast as their executives and more to ‘catch up’ to the raises and stock plans of the executive team receiving high compensation from stock and stock buybacks.

Reducing student debt, now at $1.5 trillion is critical so that prospective home buyers do not have student debt right at time they are starting families and purchasing a home.  We have proposed a far reaching program building on existing student debt forgiveness programs to more comprehensive service for debt forgiveness programs.

Builders need incentives to build lower margin homes middle class homes in new developments.  Local and state governments need to take on the charter of ensuring that affordable housing is a priority for zoning near commercial and business centers.

Fannie Mae and Freddie Mac need to be committed to focusing on first time buyers and lower income prospective buyers innovating ways to get them into homes while at the same time being financially responsible.  The Federal government needs to provide more funding for the two housing agencies to bring down rates to an affordable level.  Working in cooperation with groups like Operation Hope, banks need to make a new effort to make mid and lower income buyers financially literate and help them move into homes.  Think what a huge difference it would make for our cities and rural communities if people owned their homes and made improvements to their home and yards.

Amazon Raises Minimum Wage to $15@hr While Eliminating Bonuses, Stock

 

Photo: kansascity.com

Amazon announced the $15 pay raise today in response to criticism by progressive politicians like Sen. Bernie Sanders who recently introduced a bill to tax companies like Amazon 100 % for employees on government assistance.  The company plans to hire over 100,000 seasonal workers this holiday season, the raise will apply to all full – time, part-time and seasonal workers beginning November 1st. The pay move by Amazon comes at a time when retailers are finding it hard to hire clerks and warehouse workers for wages generally under $15 @hr.  Amazon’s move is a challenge to retail firms across the country forcing them to raise wages or lose out in hiring to Amazon.  Sen. Sanders congratulated Amazon in a tweet, noting the raise was a ‘shot heard around the world, certainly for all hourly workers worldwide.

Sources: Amazon, The Wall Street Journal – 10/2/18

While  the $15@hr wage increase made the headlines, the firm took away bonuses and stock awards for warehouse workers.  The company said the wage increase more than makes up for the loss of bonuses and stock awards.  What?  Why is Amazon doing this?  To mitigate the cost of raising wages to $15@hr to bottom line profits.  Amazon needs to think through the message they are sending, do they want the ideas and dedication that bonuses and stock recognize or not?

In addition, the company said it would be lobbying in Washington for a raise of the federal minimum wage which has been stuck at $7.25 for ten years.  Amazon uses a highly profitable server business to provide a cash feed to the retail business while building market share to eliminate competitors.  Amazon raising wages makes it even more difficult for competitors to hire workers and retain them.

Next Steps:

We applaud Amazon for waking up and making this sweeping move to raise hourly wages to a baseline of $15 @ hr.  At the same time we are concerned that with giving the wage increase they are taking away bonuses and stock awards – this policy sends  the wrong message to workers. The wage increase is a strategic move as well, putting its weaker competitors back on their heels and in a worse political position.  Are they going to oppose federal legislation that may come from a Democrat led House to raise the federal minimum wage?  In a mid-term election year where non-supervisory workers have experienced stagnating wages since the 2008 recession Amazon competitors will be hard pressed to make their case to consumers. As politics is more in the spotlight for companies and consumers, brick and mortar retailers’ possible stand against raising wages may hurt sales and hiring.

With Amazon making the first move we agree with Sen. Sanders, who called on other major companies to start paying decent wages to their employees so they support their families, buy cars and purchase a home.

The e-retailer behemoth is in the cross hairs of political criticism in terms of work conditions like few bathroom breaks, to uncertainty with plans to add 40,000 robots over the next five years. The firm’s automation plans will have a significant impact on the workplace for non-college educated workers, we need to be working on a public policy recognizing the impact automation has on worker careers.   Should robots be taxed as some have suggested?  If  so, based on what formula?  How would the funding be used to support retraining and safety net needs for the workers displaced? Amazon has been able to amass a dominant retail position by using revenues from its business to business cloud server profits to mitigate the ecommerce business running at a loss and early development of brick and mortar stores.   We stand by our earlier analysis that the server business – Amazon Web Services (AWS) be spun off from the e-retail business to level the market playing field with other retailers.

Working Class Left Out of Economic Recovery

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Photo: thedailybeast.com

As the stock market continues to defy gravity and news stories herald the second longest economic recovery since WWII, yet many working class people are left out of the recovery.  A recent report by the St. Louis Federal Reserve shows that non college graduates have lost ground or are just maintaining their economic status since 1998.

Sources: The New York Times, Federal Reserve Bank of St. Louis – 9/14/18

College graduates continue to make strides in income and dramatically increased wealth versus the median since 1989.  Though college graduates who were Black or Hispanic actually saw a decline in their wealth levels versus the median.  However, non-graduate whites while gaining some income versus the median saw their income largely stagnant and wealth accumulation flat.  Non graduate Hispanics and Blacks fared even worse than whites in the case of blacks making zero progress over the median in wealth and half the progress of whites in income over the last 30 years.

William R. Emmons, an economist at the St. Louis Fed and a co-author of its report, noted in a New York Times story, ‘the most striking result was the steep declines among white families headed by someone without a college degree. Members of this group — labeled the white working class — not only were left behind financially, but also lagged in other measures of well-being, like self-reported health, homeownership, and marriage or cohabitation rates.’

Next steps: 

We have noted in posts the urgent need for a comprehensive ‘Marshall Plan’ like imitative in our nation’s Heartland.  Unemployment is two to three times higher there, high quality education is not as accessible, the opioid epidemic is gripping major sections of the Midwest and rural South while there is a failing infrastructure with slow Internet speeds.  All this lack of investment leaves our Heartland citizens out of the economic and career opportunities that other regions have enjoyed since the Great Recession.   We recommend that the federal government provide seed funding, borrowing from the successful Silicon Valley mode of venture investment, for partnerships between universities and colleges to develop innovation centers for job training, health services, enhanced apprenticeship programs, startup incubators and installation of high speed internet fiber optic systems.  There is no time to waste, this initiative needs to be implemented immediately to prevent even further widening of the economic gap between coastal regions and our Heartland.

Declining Mobility Limits Millennials Careers, Economy

 

Image: dailymail.co.uk

More millennials are living with their parents than ever before due to lack of income, availability of housing and marriage later in life.  Moves by people under age 35 are continuing to decline.  Seniors are moving a bit more but overall they are staying put in their homes for retirement, as the cost to move to a new home is soaring.  Home prices have increased on average by 6.7 % per year over the past five years, skewed toward large square foot homes for upper income buyers.

Source: Trulia – 1/31/2018

Overall Americans are not moving like they used to in the 1990s, and before the Great Recession. In 2017, 34.9 million Americans moved to new residences, translating to a household mobility rate of 10.9%, which is the lowest rate in the last 50 years since the Census Bureau has been tracking this statistic. Lack of mobility is showing up in total household formations including rental units, new and existing home figures.  For all of 2017 there were only 400,000 household units formed, notice this is a similar pace to the aftermath of the Great Recession.

Source: Federal Reserve of St. Louis, 1/2018

The mobility that is taking place is from major cities to major cities or coast to coast.  We noted in our post on Heartland Economics that one of the issues that faces many rural regions in the South and Midwest is lack of new jobs, digital infrastructure, health and education services.  When young people in these regions cannot receive the education they need to build a career where there are jobs in the cities they stay where they are in low wage jobs with few prospects of advancement. The opioid epidemic is worst in rural regions in the country where a sense of hopelessness has set in for many people.  While in the last quarter some of these regions have seen an increase in jobs, this increase in economic activity is likely to be a passing surge from a very low economic base to begin with that will not last without long term investment.

Next Steps:

Why should we be concerned with lack of workforce mobility?  Because, when people do not move to take on new jobs, or start families or get away from home, home purchases decline, furniture sales drop, appliance sales fall and the overall economic life blood of our economy stagnates. What do we need to do?  Raise wages for workers to a decent level in each metro and rural region of the country, so people can build a nest egg and make a down payment on a home.  Rental unit pricing needs to be addressed in a way that is fair to the multiunit owner while holding down rental costs. The most recent Tax Bill passed in December of 2017 eliminated the provision for tax deductions by employers or workers for unreimbursed moving expenses.  This provision needs to be reinstated to drive the costs of moving down.  Interest on first mortgages should be made tax deductible for all regions of the country with a special emphasis on low income first time buyers. In rural regions we recommend special tax zones be established to offer incentives for investors to setup businesses there, with partnerships with local universities to build incubators for startups much along the model pioneered in Silicon Valley yet tuned to the needs of the region.  The size of our workforce is declining, we have young people staying at home so we need to address the issue of lack of mobility head on to provide the  life opportunities to our young people that earlier generations enjoyed.

57M Gig Economy Workers Hit Benefit Limits

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: thcceomagazine.com

Gig workers create millions of dollars of goods and services for the U.S. economy yet remain frustrated at not picking off a benefits stream for themselves. While, gig economy workers enjoy ‘lifestyle benefits’ they are lacking in good health insurance, retirement plans, stock options and addons like commute cost compensation, discounts at restaurants, staff lunches, evening taxi service, onsite laundry and company cafeteria.  Income is irregular and unpredictable for contractors whether the gig is a project or a longer term assignment with an agency.

In Silicon Valley and many high growth regions jobs in security, food concession, facilities management, IT, accounting, travel, web design, and HR have been outsourced, contracted or shifted to independent contractor roles working in their home. While independent contractors have autonomy and work flexibility they are missing key benefits.  Contingent workers like Uber drivers using the Uber app to find riders and handle billing are essentially working for the company yet not enjoying full time worker benefits.

So, how widespread in our economy is the contractor workforce?  Gallup completed a recent survey and found about 36 % of the workforce is engaged in some type of gig work.

Sources: Gallup, The Wall Street Journal, The Daily Shot – 9/5/18

Seven percent of workers had one traditional job and a gig job while 3 % had two gig type jobs for a total of 10 % with two jobs.  Workers in the bottom 80 % in income have seen their wages actually decline over the past 10 years. So, it is no surprise they need to hold at least two jobs to maintain their standard of living.  The number of workers holding multiple jobs has skyrocketed in the past few years.

Sources: Deutsche Bank, The Wall Street Journal, The Daily Shot – 9/5/18

Note the high during the Great Recession of multiple job holders, and yet today in a strong economy we see a similar peak in workers with multiple jobs.  Is this economy really working for the majority of the labor force?

Next Steps:

The economy has not ‘lifted all boats’, we know that the top 10 % in income received 90 % of the income gains since 2008.  The most recent Tax Bill from Congress benefited the top 1 % and corporations to the tune of a $1 trillion deficit to be paid by all taxpayers who are seeing their incomes and benefits decline.  The gig economy has been a mechanism for corporate executives and their wealthy shareholders to cut costs, pass along retirement benefits responsibility to employees and shut many workers out of profit sharing programs.

We have proposed in previous posts that in addition to raising worker wages, gig economy works would be well served if they received health insurance from birth, a retirement program in tandem with Social Security at the time of a worker’s first job and other income protections.

It is time we recognize that the gig economy is here to stay, it is a key component of the dynamism and flexibility in the workforce to drive growth and innovation – we need to plan for the just needs of workers to make the economy work for all.

Labor is Our Most Productive Asset

 

Image: progressivebumperstickers.com

“Nothing will work unless you do” – Maya Angelou

On Labor Day it is a good time to reflect on our labor force – the people who make our economy go. What has become of labor in America? Does labor hold equal power with capital? No.

Wall Street, the citadel of capital,  wields supreme power focused on profit throughout our economy and control of our government. Corporations pander to financial leaders with ever higher profits manipulated by stock buybacks juicing the value of share prices. Management ensures investors are pleased with financial results using loose financial gimmicks and laying on record debt. While workers have seen their wages stagnate for 30 years since the 1980s.

Executives are handsomely compensated at 300% of the average worker’s wage. Why? They think they ‘are’ the company. At a $400 million biotech firm, this author listened to a VP extoll the value of management over workers, “we have all the power; we decide wages, allocation of resources, when and how work is done, and we can fire them anytime”.  Yet, workers make the company go.  Nothing works until the employees make it work. Managers don’t do the work, they manage the work that is getting done.

Managers are doing what they are compensated to do – increase profits and reduce costs. In Western accounting labor is viewed as an expense while money and machines are viewed as assets. Wait, aren’t employees assets? CEOs are always telling employees at ‘all hands’ meetings they are the companies’ most important asset. Do they treat employees that way?  What about when things get tough; instead of selling equipment, moving out of buildings or reducing executive benefits they lay off employees who can least afford it. Executives need to start treating employees like they are an asset.

Maybe we need to start recognizing labor as an asset from an accounting perspective. When we label capital an asset and labor a cost we are fundamentally placing a higher value on money and a lower value on people. That framework us wrong – if anything it should be the other way around. Because people create value in corporations not money. Money does not come up with the latest innovation or new process or service – people do. We need to require corporations to report on how they are building employees as assets and worker contribution to increasing company value.  The next step is for Wall Street to recognize social responsibility in their investments as Blackrock, CEO Larry Fink, has in a letter to CEOs of companies in their portfolio that he will be looking beyond profit, for implementation of policies by management in sustainability and worker advancement.

Unfortunately labor power is at an all-time low when in a great ‘boom’ economy now the 80 % in income have experienced declining wages since the Great Recession. On Labor Day we need to dig deep and renew our commitment to recognizing labor must share equally in all corporate prosperity.

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