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Higher corporate profits through lower salaries

An article in the Sunday New York Times, Overcapacity Stalls New Jobs, sheds yet more light on the "jobless recovery" phenomenon.

According to the article, "[n]ot since the severe recession of the early 1980's has capacity use in manufacturing stayed so low for so long, government data show. Production as a percentage of total capacity fell precipitously in the aftermath of the last recession, which ended in 2001, and 23 months into the recovery, the upturn has still not come. On average, manufacturers are using less than 73 percent of their capacity."

The article doesn't attempt to explain why we have so much overcapacity. My explanation is that corporate management operates in a lemming-like fashion. Everyone else is building more capacity, so they have to also. God forbid they wind up running a profitable business that has the same amount of sales each year. Oh no! They need growth, and you can't have 20% annual growth a year without building more capacity. Everyone assumed the unusually high growth experienced at the end of the 1990s would carry on in perpetuity.

"[Procter and Gamble] invested in the 1990's in anticipation of reaching $50 billion in annual sales, but Procter's managers now find themselves rattling around in a company with $43.4 billion in sales." That's exactly the kind of thinking that dominated in the 1990s.

Overcapacity by itself doesn't explain the "jobless recovery." The explanation lies with the fact that companies are able to reduce their workforce yet still maintain the same output. If sales remain the same, but labor costs decrease, then you have higher corporate profits with fewer jobs.

In the long run, it doesn't benefit our economy if we insist on having three people do a job that only requires two, so there is no point in complaining about it. The more disturbing aspect of the article is the part where it documents the strategies that companies like Proctor and Gamble use to lower labor costs by lowering salaries.

P&G has been selling its unprofitable factories to other companies, who then are able to make them profitable by paying the employees lower salaries. For example, P&G had a plant in Cincinnati that had too much capacity and wasn't profitable. One alternative was to move the production to Mexico, but the cost of building new capacity in Mexico didn't quite make up for the fact that Mexican workers are willing to work for practically nothing. Instead the plant was sold to a company by the name of Trillium, which operates the plant as a contract manufacturer for P&G.

"Trillium hired 165 of Procter's 230 employees, maintaining their old wage of $21 to $24 an hour. But new hires replaced 50 other Procter employees at wages $5 to $8 an hour less. Trillium also brings in more temporary workers than Procter did to handle upward fluctuations in production, Mr. Wedgeworth said, rather than adding to its staff."

$24 an hour is very solidly middle class salary, and one that many college graduates would be envious of, even though the job of a factory worker is very much middle prole. But those jobs are being replaced by ones that pay less. And the article doesn't tell us how little the temporary employees get paid; nor does it tell us whether Trillium is also saving costs by reducing benefits. (If you don't understand the reference to "middle prole," then you must read the book Class: A Guide Through the American Status System, by Paul Fussell.)

The story above is yet another demonstration of how the middle class is shrinking: the factory workers get lower salaries, but the management of P&G will probably get some nice bonuses for lowering costs and increasing profits.

posted Sunday, October 19, 2003