Big Profits But Paying Poorly: Why Is This Today’s Business Philosophy?

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Jun 9, 2015

We may not all set compensation policy, but we all need to know why that policy exists.

Right now, most of us are running blind in this area. So is the business world across the globe, according to an article I ran into this week from The Economist.

When What Comes Down Doesn’t Go Up is a great piece of work that all of us should read. I’m going to include just a few pieces of information from it that will hopefully act as an enticement to you:

Even before the recession, wages had not been improving as straightforward economics might suggest — which is to say, in line with productivity. The two moved in tandem following the Second World War … but have been drifting apart since the 1960s: since 1960 productivity in America has risen by almost 220 percent, but real wages by less than 100 percent.”

Why U.S. workers aren’t as good an investment

Scholars pose a number of reasons for this and none of them is good news for the U.S. worker — who, as you can see, is becoming less and less of a good investment:

  • Income from capital (e.g. real estate and other financial assets) has been increasing more than income from labor.
  • Machines are a) getting cheaper, and, b) can do more, thus reducing the demand for labor.
  • Globalization continues to reduce the demand for “rich-country” labor. (You don’t need to be an economist to understand which countries that term refers to!)

That analysis is just the tip of the iceberg in this compelling article, which debunks the commonly held belief in our part of the world that “once unemployment gets below a certain rate, idle labor becomes scarce and competition to hire already employed workers heats up. As firms outbid each other for talent, new workers get better starter salaries and valued staff secure juicy raises.”

It seems as though this “rule of thumb” isn’t proving true post-recession in the U.S., Britain and Japan — and that’s getting economists nervous.

A recession-damaged labor market

One of the possibilities they consider is that,

It may be that the damage this recession did to the labor market — the loss of skills and the mismatch between industries where workers have experience and those where there are vacancies — is being expressed not in the form of long-term unemployment but as lasting low pay.”

And, that would put you and me in a whole new world.

There are lots more interesting topics here — like how much employees’ growing preference for job flexibility is influencing what competitive pay means. As the author points out, hiring temporary workers who are easy to fire (and will go away quietly at the end of the contract) takes the worry out of hiring — at least from an economic standpoint. And that may influence the economic footing of all workers, it turns out.

There’s a lot to chew on, and even more to learn from. But don’t take my word for it. You decide.

This was originally published at the Compensation Café blog, where you can find a daily dose of caffeinated conversation on everything compensation.