Efficiencies Are a Service to People

by Don Boudreaux on April 3, 2007

in Seen and Unseen

As evidenced by this op-ed in today’s edition of USA Today, there’s a lot of anxiety about Circuit City’s announcement that it’s laying off many of its workers.  As usual, much of this anxiety is unnecessary, fueled as it is by misunderstanding and faulty reasoning.  Here’s a letter that I sent to USA Today in response:

Dear Editor:

When
criticizing Circuit City’s decision to lay off many of its employees,
you miss two crucial facts ("Circuit City’s harsh layoffs give glimpse
of a new world," April 3).

First, Circuit City is responding to
consumers.  As electronic products become less expensive and easier to
use, consumers have less need for on-site personal service.  This fact
is one reason why consumers buy increasingly from on-line retailers.

Second,
the money that consumers save by buying on-line doesn’t disappear.
Each dollar is either saved and invested or is spent on goods and
services that previously were too expensive for most consumers.  Either
way, opportunities are created.

Be Sociable, Share!

Comments

comments

100 comments    Share Share    Print    Email

{ 50 comments }

happyjuggler0 April 3, 2007 at 1:15 pm

I would add that productivity increases (perhaps by one's competitors or suppliers, not necessarily one's own business) in a mature market mean that fewer workers are needed.

The absence of productivity increases means zero wage increases overall, with one person only getting a raise at someone else's expense.

Therefore anyone who wants a raise ought to applaud "downsizing" when it occurs for orgnaic reasons (as opposed to artifical government reasons such as tazes or regulations). Ideally such downsizing would occur gradually through natural attrition, but sometimes (usually?) this isn't practical.

The laid off workers are now free to produce something else, ideally in an industry that is far from mature, and the sum of their new product as well as the the increase in value by fewer workers at their old employer adds up increased valeu overall for workers/consumers.

This needs a dynamic job market to work though, and any government policy that hinders firing also hinders hiring (hiring becomes more expensive when you must wait for natural attrition to fire workers).

It also needs well funded entrepreneurs to create those new and expanding industries that create the jobs for those freed up redundant workers.

Brad Hutchings April 3, 2007 at 1:44 pm

About time. Now hopefully Best Buy will follow suit. I would have no problem at all buying from either store if I didn't feel smothered and fought over every time I walk in. There is a silver lining for all the laid of workers though… If they wait until the day after Thanksgiving, Circus City will need to hire them on as temps for the early morning sales event. When the register line snakes 1/4 mile around the store, you're a wee bit understaffed!

One other thing about Circuit City… The Internet is killing them on high margin items. Their selection of even great brands like Sony is incomplete. Teenagers and technophobes shop there. Anyone who's serious about audio and video can get a better deal with better selection and far better service from a "full price" online dealer like Crutchfield.com. OK, and another thing… Their whole profit margin is in warrantees and marked up cables. Basically the only reason they've ever made money is because enough people are (a) stupid and (b) impatient.

</rant>

M. Hodak April 3, 2007 at 3:56 pm

Newspapers publish this stuff because readers buy it.

They should teach economics in high school. The first class would be "What is visible and what is not." In fact, that could be the first semester. Unfortunately, a note from Don is not enough, even if the editors mistakenly publish it on the front page.

Matt April 3, 2007 at 4:27 pm

We might also remind certain folks that if Circuit City does not lay off workers when necessary to remain competitive and responsive to consumers… then eventually all of its workers will be laid off when the company folds.

True_Liberal April 3, 2007 at 5:30 pm

The obvious answer is legislated protection from "unfair" competition, isn't it?

What a metaphor for the steel, paper, auto etc. industries!

Adam April 3, 2007 at 5:42 pm

Everything above is perfectly true, but still, laying people off and then offering them their old jobs at a lower wage…

I don't think this is going to do much for employee morale. I doubt that anyone who works at Circuit City and survives these cuts will feel any sliver of loyalty to the company. That goes double for someone who's hired back at a reduced salary.

Adam April 3, 2007 at 6:29 pm

I should add that I absolutely do not think "there should be a law" against doing this sort of thing… I just think it's excessively ruthless (not that I've seen their financial statements, but unless they're about to go bankrupt…).

ben April 3, 2007 at 6:41 pm

Adam if you're right and the costs of this low morale outweigh other benefits from layoffs then CC's management have some explaining to do.

Adam April 3, 2007 at 7:22 pm

You're right Ben, but my point is a bit broader than that. Unless without these layoffs CC is going to go belly up (or near to it), I don't think they're acceptable. There are various ways to cut labour costs, including not giving raises, a hiring freeze that leaves jobs unfilled, etc. This way is probably the most drastic.

I'm a libertarian and I don't think it should be illegal to fire people, but to go this far is a but much. As libertarians we're always quick to say that people should be allowed to do things with which with disagree. We're less quick to say that we disagree with some of the things people should be allowed to do. There shouldn't be a law, but there should be some self-restraint. The same goes for what is unseen – yes, that's important but what is seen is not inconsequential either.

Change that creates dislocation is often positive, but often it causes massive disruption in people's lives. Such change should not be avoided but nor should it be pursued unless there are real, significant gains to be made. In other words, was it really that vital to reduce wages (now!) that they had to go this way instead of a less drastic route?

Mike April 3, 2007 at 11:29 pm

As to hiring back laid off workers at lower wages, why assume that those workers will be the ones hired? Isn't it possible that different people will fill those positions and the former employees move on to work elsewhere at a wage comparable to their past one. If their productivity warrants a better wage than CC will offer they should move on. If not, well then…thats a shame but why should consumers subsidize their lack of skills and productivity. On a side note, I've never had particularly good experiences with CC employees, at least locally, compared to BestBuy.

ben April 4, 2007 at 1:40 am

"Unless without these layoffs CC is going to go belly up (or near to it), I don't think they're acceptable"

I think it is acceptable. In fact, I think it is extraordinarily positive that a company need not employ staff who, because of changing demand or technology or market conditions, no longer create value for the company. Those staff can then be redistributed elsewhere in the economy and create value. Everybody wins, including, I expect, many of the workers laid off. We are all the poorer when scarce resources are misallocated.

Adam April 4, 2007 at 7:51 am

"As to hiring back laid off workers at lower wages, why assume that those workers will be the ones hired?"

They won't necessarily, but CC has said they'll be offered their old jobs back at reduced pay so presumably some will accept.

"why should consumers subsidize their lack of skills and productivity."

Because you don't just cut people off abruptly. I loathe the welfare system, but I don't think it would be right to simply say that the next cheque is the last one.

People need time to adjust, just like a drug addict usually can't just stop cold turkey. Sometimes the situation justifies an abrupt change, e.g. the farm protectionism that is literally killing people by driving up food prices and ruining third-world producers. Get rid of it yesterday. But barring such a scenario, wean people off their subsidies gently (especially when, as in this case, it was CC's mistake and not the employees' to pay the higher wage).

Ray April 4, 2007 at 8:29 am

Yep – they must have been living too high on $11/hr – too bad they didn't have parents that paid for their college and set them up.

Greg April 4, 2007 at 10:33 am

"Because you don't just cut people off abruptly. I loathe the welfare system, but I don't think it would be right to simply say that the next cheque is the last one."

We have such a protection system. It is called unemployment insurance. As an employer for the last 30 years, I can tell you that in the real world employees almost invariably find a cash job and neglect to look for new employment until the payments run out.

Since it is a tax on total payroll, it is effectively paid for by the employee. If the employees were given a choice I doubt many would opt for it as a payroll deduction.

I had a manager who was incensed to learn that the business had to pay a percentage of his pay towards this insurance that he did not want. "Why don't they just let those who want it pay for it themselves?" he asked. Good question I said.

Just one more example of legislators thinking they know better what their constituents need than their constituents do themselves.

One more point: Many times I have been "abruptly cut off" by an employee without warning leaving me to deal with customer demands short handed.

Keith April 4, 2007 at 10:35 am

"Because you don't just cut people off abruptly. I loathe the welfare system, but I don't think it would be right to simply say that the next cheque is the last one."

Why don't you hire them then?

Methinks April 4, 2007 at 10:48 am

Adam,

Who cares if the employees are "loyal"? Employment is at will. If the laid off employees feel bitter toward CC, then they can find another job. we all look out for our best interest and no employee will stay with a company solely because they are "loyal" to it.

You are loyal to your spouse, your children and your country, not to your employer. If someone offers an employee a better working arrangement, that employee will leave. We don't call that "disloyal", we call that smart!

Your assertion that "that's not right" has an air of ethical objection. There's nothing wrong with what CC did. It offered an arrangement that the employees are free to accept or reject. If you are questioning the wisdom of CC's management decision and its impact on company productivity, that's one thing. If you're questioning the ethics of that offer, then I don't think you have a leg to stand on.

Adam April 4, 2007 at 11:55 am

Greg, when I said "don't cut people off instantly" I meant people on welfare, not workers. I completely agree with everything else you said.

Keith, thanks for your constructive comment. I do pay for welfare benefits through my taxes. I still don't think people should be cut off instantly, without any chance to adjust. I don't believe that the savings to me (which would be zero in any case since the money would be re-budgeted elsewhere for some other inane scheme) are worth the disruption to their lives. If you disagree, that's fine – neither your opinion nor mine will determine public policy so it's not as if they're affecting anyone in any case.

Methinks, any sensible employer cares about morale and loyalty. I think most businesses want employees who are happy in their jobs and do it because they like it rather than people who are waiting out the clock until the end of their shifts. Especially in jobs where you're dealing with the public.

Loyalty doesn't have to always mean the same thing in every context. Of course I'm more loyal to my friends and family than my employer but there are boundaries.

For example, last summer I had a job offer and was waiting for another employer to make up its mind (I figured it would be a yes, eventually). Several people told me that I could always accept the first one and if the other came through, jump ship after a couple of weeks. Would I have been entitled to do it? Sure. Would I have been a jerk? Yes, unless the first job turned out to be completely different from what they led me to expect. It wouldn't have done much for my reputation in my field, although to me the ethics alone meant that it was not an option.

For another example, a colleague of mine once told me about a friend whose employer RECALLED HIM FROM VACATION to tell him he was fired. Sure they were entitled to do it, but for God's sake what was the point of being pricks by cutting his vacation short? Would anything have changed if they'd told him when he got back?

Business ethics isn't a contradiction in terms, it's a fundamental aspect of commerce. It's one of the major reasons we don't need government looking over our shoulder. Do you believe that under no circumstances whatsoever can you criticize a business on ethical grounds?

Again, I can acknowledge that CC has the right to treat their employees this way without liking it. I suspect going this route is a bad business decision from the employee morale/productivity point of view, but there are other reasons why I think it's incorrect.

Methinks April 4, 2007 at 12:27 pm

“RECALLED HIM FROM VACATION to tell him he was fired. Sure they were entitled to do it, but for God's sake what was the point of being pricks by cutting his vacation short? Would anything have changed if they'd told him when he got back?”

Yes, if it was paid vacation. No, if it wasn’t. It’s not a nice thing to do, but maybe the guy was caught embezzling while on vacation. More importantly, what’s the loyalty lesson here?

“..Several people told me that I could always accept the first one and if the other came through, jump ship after a couple of weeks. Would I have been entitled to do it? Sure. Would I have been a jerk? Yes, unless the first job turned out to be completely different from what they led me to expect.”

Well, the bigger problem is that you’ll be burning bridges. Still, all this proves is that you’re not a jerk and that you don’t want to burn bridges. It has nothing to do with loyalty to your employer. What are you loyal to – other than your personal ethical code – in this example?

Adam, I think you're still mixing up ethics and devotion. In general, employment is a contract between two parties which does not require either party to be devoted to each other at ll costs. The employee is not obligated to continue to work for the employer, despite better opportunities and the employer is not required to employ the worker at all cost. There's no loyalty issue here.

From a business perspective, I understand what you're saying. But I'm not sure you and I are in a position to adequately pass judgment on the effects on morale at Circuit City. Incidentally, I used to work for CC (which makes me no expert). I seem to remember that the sales staff is on a commission and there are few are career sales people. Most are transient workers, as I was, trying to earn money for college and the like. Our commissions were pretty good, though. I could make enough money to pay a full year’s college tuition working summers and holidays. Just my anecdote. As for the abrupt nature of the lay-offs – that’s why your mother always told you to save for a rainy day. Your personal welfare is your business – not your employers.

Cheers.

Adam April 4, 2007 at 1:38 pm

"Yes, if it was paid vacation. No, if it wasn’t. It’s not a nice thing to do, but maybe the guy was caught embezzling while on vacation. More importantly, what’s the loyalty lesson here?"

Of course, I'm assuming he wasn't fired for cause (my friend probably would have mentioned that). But even if it was paid vacation, surely he could have been terminated and then informed upon his return. Besides, if they recalled him I'm certain that they would have paid for his last-minute ticket home, which probably cost at least as much as a week's salary.

"What are you loyal to – other than your personal ethical code – in this example?"

Neither anecdote is really about loyalty, they're more about imposing voluntary self-restraints on one's actions due to ethical constraints.

"As for the abrupt nature of the lay-offs – that’s why your mother always told you to save for a rainy day. Your personal welfare is your business – not your employers."

Yes, but I don't think that employers should be indifferent to an employee's personal welfare. It's up to them, but within the limits of what's commercially reasonable (not possible, but just reasonable) I think employees be given a break.

If you can achieve the same reductions in labour costs in a different way that doesn't cause as much disruption to as many people, I think it's preferable to go that route. Again, I don't know the specifics of the CC situation and I agree that I'm not in a position to judge what they're doing in this specific instance without making several assumptions. That said, assuming that there's no financial crisis, that these layoffs will cause significant upheaval in people's lives, and that there's a way to reach the same goal without significant harm (yes, I know it's a vague term) to the corporation, I think the decision is unreasonable.

Methinks April 4, 2007 at 2:29 pm

Well, Adam, if you ever run your own company, you can institute whatever policy you want regarding firing employees. Come to think of it, I’m not sure that these CC people were fired abruptly.

I think you're overstating the "upheaval". Plus, and I think you’ll agree, that your normative statements aren’t really grounded in iron-clad business logic so much as they are gentle feelings toward the employees. That’s cool, as long as you don’t try to impose your feelings in the form of a change in the law.

dagny April 4, 2007 at 2:39 pm

They should teach economics in high school

My high school did teach economics. Well, let me rephrase that: I went to a class called Economics five days a week for a semester, and there I looked at a bunch of charts, memorized a few terms, and learned that Chinese people are all out to steal my precious, red-blooded American kidneys.

I think it would have been better if my school HADN'T taught Economics, I hate to think how many students have left that class thinking that it actually had anything to do with an actual understanding of the economy.

Adam April 4, 2007 at 2:49 pm

"I think you're overstating the "upheaval"."

Maybe, I don't know. My own job search last year was fairly painless, but obviously your mileage may vary.

"Plus, and I think you’ll agree, that your normative statements aren’t really grounded in iron-clad business logic so much as they are gentle feelings toward the employees. That’s cool, as long as you don’t try to impose your feelings in the form of a change in the law."

I do agree, and I wouldn't dream of doing so (it would be intrusive and counter-productive).

M. Hodak April 4, 2007 at 3:05 pm

Well, I have to qualify my comment about econ teaching in schools:

I think everyone should learn ECONOMICS, not the admittedly pale substitute for what passes for economics in most schools where it is taught. I also don't think any schools should be compelled to teach economics via state bureaucracy, not so much because of my antipathy to enforcing any particular curriculum on our immpressionable young, but because the talent to do it right is not out there, re Dagny's example, and via my experience with the Marxist tripe that my own kids are taught as "economics."

I should have limited my suggestion to teaching micro-economic logic, i.e., the seen and the unseen, basic price theory, and incentive effects, although I'm sure even that would be bollixed by my kids teachers.

ben April 4, 2007 at 3:20 pm

The "loyalty" claim always amuses me – in what sense is a long-term employee any more loyal to a company than the company is loyal to the employee? Both have alternatives, neither has taken them.

Heretic April 4, 2007 at 4:48 pm

"Alan Blinder, a former Federal Reserve vice chairman, fears that in the next 10 to 20 years, this country could see 40 million jobs in such areas as accounting, health care and computer programming move overseas. He says the Internet and other communications advances make the physical location of these workers all but irrelevant."

This Blinder guy is doing a lot of damage. I think the protectionists are gleeful to misuse him as an ally, particularly since they can also use him as a highly credentialed "convert" to their cause. Realistically, the placeless society has been nothing but good for business all around. The USA plays the global game very well, and can be counted as a big winner. Fighting the placeless game today with market distortions would be like protecting transatlantic passenger shipping at the advent of the jet age. For every Circuit City store that is "seen" to close, there is a small entrepreneurial online merchant somewhere who is thriving (and creating jobs). Truth is, I usually get BETTER customer service from online vendors than in person at a bricks and mortar store. Is the internet really the problem for CC, or is it that the expertise provided was simply not worth the price premium? I stopped going to CC years ago because I did not like to be mugged by their annoying commissioned salespeople.

ben April 4, 2007 at 9:48 pm

Here's what I really what I wanted to say Adam in response to your "unacceptable" comment. It really is nobody else's business. If CC writes contracts with its employees that permit such behaviour, and employees agree, then that is the agreement they have reached. Both sides have many alternatives. I hardly see grounds for complaint when the full set of possibilities that contract permits comes to pass. Unless CC has breached its agreement or the law, which you don't allege, there can be no problem because employees signed an agreement to this treatment in advance. And please don't pretend this couldn't be anticipated – I have never seen an employment contract that did not make termination conditions very clear, for obvious reasons.

Martin April 5, 2007 at 2:13 am

Interesting discussion.

Adam, you're onto a loser with these people – they're hardcore.

But well done for trying.

If 'Methinks', who recently ran away from an argument with me at 'Marginal Revolution' because they can't handle argument, is happy being described as a 'human resource' then good for them – no employer, nobody who needs labour to either operate or expand their business, will ever categorise me like they would a pen or a stapler.

And any employer who fired me on cost grounds while on vacation would find their name, business and e-mail addresses and cellphone number on the Internet within hours.

Methinks April 5, 2007 at 8:49 am

Martin,

I refused to continue the discussion on Marginal Revolution with you because of your circular logic and your incoherence. You neither understood a word I wrote nor could you cobble together an argument for whatever position you were trying to take.

My mother always taught me never to argue with idiots. Passersby will have trouble distinguishing which is which.

Lee April 5, 2007 at 11:27 am

I agree with Adam.

Not all of those actions which we consider immoral do we want to illegalise. For example, I may disapprove of promiscuity, but I would never try and make it illegal. I tend to simply voice my disapproval and/or will avoid people who are promiscuous.

In short, it's not illegal to be a jerk and few people would seriously consider making it so, but that doesn't mean we have to approve, like or wish to deal with people who act like jerks.

Methinks April 5, 2007 at 12:11 pm

Lee, good point. I wouldn't disagree with that. And, yes, I do realize that's what Adam is saying. He made himself very clear in his last post.

Adam April 5, 2007 at 4:01 pm

Ben, I don't think it's inappropriate for me to have an opinion on CC's employee policies. It's not my place to change them, but I see no reason why I can't have and express my own views.

There's one other point I think is important, which is that the more individuals (and corporations) act like jerks (as seen by the average person), the more likely we are to have laws and regulations attempting to remedy the perceived problem.

The more corporations are seen to mistreat employees, the more regulation of the employer-employee relationship we'll see. Sometimes it's best to exercise restraint in using your freedom, lest someone use your actions to justify taking it away from you. It sucks, but I'd say that's the way it is.

Methinks April 5, 2007 at 5:27 pm

"The more corporations are seen to mistreat employees, the more regulation of the employer-employee relationship we'll see."

Now you've gone too far. The employees were not "mistreated". They were laid off. If you equate cutting costs to increase profit in a corporation with mistreatment, then you're pushing a communist ideal.

If you think that companies have a greater duty to their employees than their shareholders, then you are pushing a communist ideal.

Out of curiosity, if you don't like what Circuit City did, what would you have done if you were the decision maker in this situation?

Adam April 5, 2007 at 8:26 pm

Methinks, you're misunderstanding me. I said "seen" to mistreat. Like it or not, this kind of behaviour is seen as mistreatment by many people. I'm not saying I agree, I'm just saying that's how a lot of people will see it and say, see, we need government to stop these abuses. I don't agree but that's the way a lot of folks think.

Like I said above, I think a hiring or wage freeze could have at least attenuated the need for firings (maybe there were such freezes, I don't know).

Adam April 5, 2007 at 8:39 pm

Methinks, I said seen to because I'm talking about perception and not reality. Mistreatment is in the eye of the beholder and even if I don't think it's mistreatment, others do. It will lead to cries for state intervention to stop "abuses."

A hiring freeze or wage freeze, if not already in place, would probably help, I think.

Adam April 5, 2007 at 9:09 pm

Oops, sorry about the double post. Should have hit refresh to see that the first one did get sent…

Methinks April 5, 2007 at 9:23 pm

"A hiring freeze or wage freeze, if not already in place, would probably help, I think."

But the hiring freeze would do nothing for the profit margin, since they clearly have all the sales people they want now and are not afraid of losing some of the ones they already have.

The wage freeze would would not lower the current cost. It would keep the current cost the same, so how does that help profit margin?

Aside from not fixing the profit margin issue for Circuit City, don't you think that a wage freeze would also have a major impact on employee morale – a condition you were trying to avoid? A worker may not be so motivated to become more productive if he doesn't think his pay will reflect additional productivity. And couldn't a wage freeze be read as mistreatment?

How would either of these two suggestions increase competitiveness for Circuit City (which is getting its butt kicked by Best Buy, btw). Remembering, of course, that if it can't compete ALL of the Circuit City employees will abruptly lose their jobs.

Martin April 6, 2007 at 1:57 am

By what proportion has executive compensation increased at Circuit City in the two years prior to the lay-offs?

Maybe the organisation wouldn't actually need to lay off/sack/downsize its workforce if its managers paid themselves less.

But no, these guys are all (yawn) cream of the crop…who…need…these..incentives…to perfo..zzzzzzzzzzzzzzzzzzzzzzzzzzz……….

jn April 6, 2007 at 10:56 am

In a smartly run organization, management's share of total revenue should be fairly small (in terms of wages), since in most organizations management should not account for more than about 15-20% of the total work force.

Where I work, management only accounts for 10% of the total company-wide payroll.

Adam April 6, 2007 at 11:31 am

"But the hiring freeze would do nothing for the profit margin, since they clearly have all the sales people they want now and are not afraid of losing some of the ones they already have.

The wage freeze would would not lower the current cost. It would keep the current cost the same, so how does that help profit margin?"

For sure, it's not like there's a cuddly way to reduce labour costs (short of lavish buyout packages, but I doubt that's a sensible option for this kind of job). But I think morale would be affected less by those measures than by outright dismissals. I think there's a big difference, both real and perceived, between "we're letting you go (but you can come back at a much lower wage)" versus "we can't raise your pay for the next X years."

A wage freeze would lower costs in the medium term, as inflation reduces the real value of the same salary. The hiring freeze would reduce costs in the same time frame, as people who leave are not replaced. The fact that these strategies would take longer to bear fruit is why I was emphasizing the issue of urgency – if the company is doing OK but not great and doesn't need to fix the problem immediately or face serious consequences, then freezes could work.

Again, I have no idea how urgent the problem is and what other considerations there are, so maybe this really was the only option. I simply don't know. Obviously if the company is on the verge of bankruptcy, any solution is a better option than letting the whole thing go under.

Methinks April 6, 2007 at 1:46 pm

Circuit City is getting its butt kicked by Best Buy right and internet shopping now – not in the medium term. So, the action is urgent. In fact, part of the problem with Circuit City is that the company didn't adjust its business model to the changing competitive landscape. That's why they're in trouble. Costs have to be cut now, not in the medium term. So, we have to talk about the given situation, not a hypothetical situation.

You gave it good try but neither of your solutions address the given problem. In addition, they actually reduce employee morale. What Circuit City did put the choice in the employees hands. They have two choices: 1.) if they still want to work for Circuit City and are willing to earn less per sale (keeping in mind that sales people are on commission), or they can or 2.) They can find a situation with another firm which is better suited to them. This is a fair, honest and upfront way to deal with people. It lays the cards on the tabel and gives them choice. I've found that there's nothing employees hate more than to be strung along "in their best interest". each employee rightly assumes that he or she can make better decisions for him or herself than the employer can for them and resents patronizing by the company. Employees aren't so dumb that they don't realize that a wage freeze is a back door wage cut.

Also, I don't think we'll have more regulation of emplioyee/employer relationship without a large adverse effect on overall unemployment. Look to the giant giant unemployment rate of the under 25 set for effects on employment regulation. In France, it is almost impossible to fire someone once hired. So, employers just don't bother taking the risk of hiring younger, less skilled labour at all. Changing the "at will" employment law in the United States would have a similar impact (depending on the extent of the law). But you already know this as evidenced by this earlier exchange:

me:"…That’s cool, as long as you don’t try to impose your feelings in the form of a change in the law."

Adam: "I do agree, and I wouldn't dream of doing so (it would be intrusive and counter-productive)."

I think the lesson here is that change is hard but we all have to go through it! Life is not always easy but masking reality with onerous labour laws and price controls (voluntary or involuntary) only makes the inevitable adjustment worse. Your statement above shows that you know this to be true, no?

Python April 6, 2007 at 3:36 pm

Martin,

How would you suggest to improve a company who can see that in the near future, cuts might need to be made? Would you cut salaries of the management, or cut the jobs of the lower paid, or perhaps some other alternative like launching a new marketing campaign?

The problem of having too many sales people on the floor won't be relieved by cutting salaries of managers or executives. Unless you believe the cuts to execs salaries can lower prices and create more demand in the store.

The purpose of owning businesses is not to employ people. Employing people is a flexible need in most businesses. But try to name any business that, for the sole purpose of keeping people employed at a good wage, were able to stay a strong company. The obvious reason is that competition and innovation change business models constantly. There is not a single company in the US that employs people the same way now as it did just 25 years ago. Not one that I can think of. Those that look similar have all gone through rounds of contract buy-outs, early retirements, factory closings and re-openings, etc.

Please, lay out your plan of what you would do if you were in charge of Circuit City. Look at the details of their earnings, their future as a brick and mortar technology reseller, and come up with a coherent plan.

"Maybe the organisation wouldn't actually need to lay off/sack/downsize its workforce if its managers paid themselves less."

Your knee-jerk anti-business responses are becoming tiresome in their lack of clarity. Bring some facts to the table, lay out your opinions, and defend them.

Adam April 6, 2007 at 4:23 pm

Sure Methinks, as I said I agree with you completely. French labour law is just plain stupid and hurts poor and unskilled workers the most. But try telling that to the French – I've lived there and they just won't listen to reason. If I had to choose between the Continental and Scandinavian models, I'd choose the latter in a heartbeat – high taxes but a very flexible labour market are more sensible than high taxes and laws that basically might as well make it illegal to hire anyone. It's a wonder to me that anyone believes in "worker protection" when even the nice, cuddly Swedes don't have those kinds of laws (hell, they don't even have a uniform minimum wage).

That said I still think a wage freeze is better than a lay-off (I'd rather have my salary stay the same than lose my job, and I doubt I'm peculiar in that respect). Within a couple of years I'd expect it to show up big-time on the bottom line.

If CC is getting its butt kicked and can't wait a couple of years to right the ship, well, you do what you have to in order to survive. Nothing wrong with that. I've been having this discussion more or less in the abstract because what do I know about CC's financial position?

Nadia April 6, 2007 at 6:27 pm

I might be wrong, but to me wage freeze is analogous to any price freeze and as soon as the prices are fixed the usefulness and the purpose of price system of guiding the entrepreneurs in their calculation disappears.

Martin April 7, 2007 at 1:53 am

Python,

"The purpose of owning businesses is not to employ people."

Agreed.

"Employing people is a flexible need in most businesses."

Big assumption, but let's take it at face value.

Business owners employ people to perform functions that they either

1 Cannot; or

2. Will not;

perform themselves. Goldman Sachs' CEO cannot be present in business meetings doing different deals in Tokyo, London and Buenos Aires at the same time; Steve Jobs does not make each iPod he sells with his own hands; Bill Gates does not personally write every line of code on every copy of every Window product that's sold; Maree-Josee Kravis does not clean the Ford Building's washrooms, etc.

Now that we're reading from the same balance sheet, let's roll the options.

"The problem of having too many sales people on the floor won't be relieved by cutting salaries of managers or executives. "

True, for sure; although who hired the sales guys? The executives and managers.

And who was it who -

a. Set the sales targets too high OR
b. Didn't get the inventory right OR
c. Didn't get the product balance right OR
d. Didn't get the marketing right OR
e. Failed to develop an appropriate Internet strategy

that led the business to underperform? It wasn't the stiffs on the floor…and at all times and under all circumstances, mass redundancies are symptomatic of previous management failures…failures which usually happen quite high up the food chain…

In this situation we're describing here, do the executives and managers get to keep their jobs? Or if they are forced to walk a plank, do they get the benefit of contractual compensation?

If either option applies, it shouldn't.

Your suggestion that "cuts to execs salaries can lower prices and create more demand in the store" is, in principle, sound. It's a pity it's an option that boards and executives never seem to consider. I wonder why.

That the character of the labour market over the past 25 years has changed is not in dispute; but so have many other things. According to Wikipedia, in 1980 the USA's Gini Coefficient was 0.403; in 2005 it was 0.469 –

"Some argue this rise corresponds to the lowering of the highest tax bracket, for example, from 70% in the 1960s to 35% by 2000. However, many other variables that could affect the Gini coefficient have changed during this period as well. For example, much technological progress has occurred, eliminating formerly middle-class factory jobs in favor of the service sector; additionally, the economy has shifted towards professions that require higher education." –

http://en.wikipedia.org/wiki/Gini_coefficient

And of course executive compensation's also been on an inexorable upward march –

"This paper examines both empirically and theoretically the growth of U.S. executive pay during the period 1993-2003. During this period, pay has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size. During the 1993-2003 period, equity-based compensation has increased considerably in both new economy and old economy firms, but this growth has not been accompanied by a substitution effect, i.e., a reduction in non-equity compensation. The aggregate compensation paid by public companies to their top-five executives during the considered period added up to about $350 billion, and the ratio of this aggregate top-five compensation to the aggregate earnings of these firms increased from 5% in 1993-1995 to about 10% in 2001-2003. " –

Bebchuk & Grinstein, 'The Growth of Executive Pay', Social Science Research Network –

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=648682

Personally, as a matter of logic it's hard to see how the increased fungibility of employment contracts and terms over one period and a phenomenal growth in executive compensation and a rise in inequality over the same period cannot be unrelated.

I might be missing something.

Of course, the rise in executive compensation could be accounted for because of the almost exponential growth in productivity over the same period; but if that were the case, should it not also be the case that the same gains should have percolated into the wages paid on the shop floor?

They haven't; at least according to Sen. Max Baucus.

From a speech carried on the website of the USA's embassy to Uruguay –

"At a time when our country's competitive strength depends increasingly on an aggressive trade policy, Americans are far less willing to embrace one. Many equate trade and globalization with ballooning deficits, stagnating wages and layoffs" –

http://montevideo.usembassy.gov/usaweb/2007/07-128aEN.shtml

This is not a problem which has appeared overnight; from 'Cornell News' in 2001 –

"In the corporate quest for lowest production costs and higher profits, shifts to China (as well as to other countries) have led to stagnating wages, decreased employment and increased income inequality in the United States and abroad where similar production shifts have occurred. These results are contrary to the promise of rising wages and living standards that free trade and global economic integration were supposed to provide" –

http://www.news.cornell.edu/releases/Aug01/USChina.ILR.html

Now, who's won from all these changes? Looks like the execs.

And it looks like the public haven't really bought into the Hayekian 'O, O, I 've got a new cell with Bluetooth and 4 gig download so that means we are all richer' guff peddled by the Virginia School.

But they're just the citizens. What do they know?

Well, we can start with the value of the money in their wallets…

I am not 'anti-business'; I am pro-citizen.

Are you?

Because if I didn't know better, Python, I'd think you were an apologist for the 'executive as member of a divinely appointed guild' school of business and social thought.

In this case, let everyone feel the pain.

Adam,

Flexibility = Fungibility = Poverty.

Kent Gatewood April 7, 2007 at 11:54 am

Get rid of the term "laid off", go with "fired."

Adam April 7, 2007 at 12:35 pm

"Flexibility = Fungibility = Poverty."

Huh?

Nadia: price and wage freezes screw up signals when imposed by the state, it's a whole other story when you're talking about a business doing it internally.

Python April 7, 2007 at 2:02 pm

Martin,

I just read every word that you wrote. I don't understand how you can type so much and still not have a point that I can take away and say "that's what Martin believes Circuit City should do."

You say "And who was it who -

a. Set the sales targets too high OR
b. Didn't get the inventory right OR
c. Didn't get the product balance right OR
d. Didn't get the marketing right OR
e. Failed to develop an appropriate Internet strategy

that led the business to underperform? It wasn't the stiffs on the floor…"

Why do you call it "underperform"? If you don't limit yourself to thinking that way you can see many more possibilities such as:
f. Consumers have changed their buying preferences and the current workforce is not the appropriate size.

When workforces increase in some sectors (say biotech, IT,etc) in the past 20 years we call it progress. But when certain companies downsize you call it mismanagement. This is not consistent. There should be fewer people at Circuit City if the "citizens" chose to shop elsewhere.

If CC hired too many people, are you happy that at least those people had jobs for a while, or are you disappointed that management couldn't tweak their strategies to match their employment? I don't see consistency in how you are upset that people got laid off but you aren't happy that they were hired to begin with. Did CC do anything right in your eyes?

Still waiting for what you would do if you were in charge of Circuit City.

As for the Gini…

The Gini coefficient has been used by many people who don't really understand how it's computed. Firstly, you need to make a leap of faith that equality in INCOME is something to be acheived.

The Gini coefficient is nearly worthless when discussing the United States. The biggest reason is that it tries to make one number out of a large, diverse population to show equality. Here is a test. What is the Gini coefficient for Western Europe? I don't mean the individual GCs for each western European country, I mean for all of Western Europe as a group. Add up the populations of Portugal, Spain, France, UK, Germany, Italy, Switzerland, and all the Benelux countries, (it's fairly close to the United States) and calculate their GC.

How can you compare the income of people in Knoxville with those in New York City or San Francisco? The people in Knoxville have very different costs than others. In Knoxville, they are "happy" if their income is only half of those living in Manhattan. But Gini wouldn't make them look economically similar. To make my point further, what is the Gini Coefficient of the entire world?

In addition, how well does it take immigration into account – which can make the same country go up or down as its immigration changes? How well does it take into account young people entering the workforce? Even your Wikipedia reference cites many of the problems. Read what they have to say about Swedish stockholders, and still tell me you think it is a meaningful stat.

Show me a single country with each of the following:
a) a lower Gini than the US
b) higher immigration rates than the US
c) higher birth rates than the US

Here is the final Gini question: would you rather be a random citizen in a country who's Gini Coefficient was .5 and the MEDIAN income was $45K, or a country who's Gini Coefficient was .3 and the MEDIAN income was $30K? Maybe you begin to understand how using one number to discuss an economy is not a sound methodology.

Martin April 8, 2007 at 1:26 pm

Python,

Circuit City should

1. Identify how it got into the mess it's in;
2. Sack the executives responsible 'pour encourager les autres';
3. Redesign its business accordingly. If it has failed to adapt to Internet retailing, adapt itself. If the business needs fewer staff, have fewer staff.

What it should not do is indulge the spastic 'we're losing money – let's dump the staff!' reflex which passes for thought amongst modern management; a reflex borne of employers' habitual reference to other people as 'human resources'.

And when you say 'the current workforce is not the appropriate size', presumably you acknowledge that it might be top heavy with management; so they should get their cards as well.

Good. Glad we understand each other.

"When workforces increase in some sectors (say biotech, IT,etc) in the past 20 years we call it progress. But when certain companies downsize you call it mismanagement. This is not consistent. There should be fewer people at Circuit City if the "citizens" chose to shop elsewhere."

Granted, of course; however it is also inconsistent to infer that some instances of 'downsizing' (yuk!) are not the consequence of mismanagement.

"If CC hired too many people, are you happy that at least those people had jobs for a while, or are you disappointed that management couldn't tweak their strategies to match their employment?"

The latter; but heck, we don't live in a perfect world.

"The Gini coefficient has been used by many people who don't really understand how it's computed. Firstly, you need to make a leap of faith that equality in INCOME is something to be acheived."

That's not a leap of faith I'm willing to make (Don Barzini – 'We are not Communists'), but it is not, what was it, ah yes, 'inconsistent' to also be unhappy with gross income disparities. That the stuff we're able to buy enriches us is true within limits – the principal limit being buying power. Wages are buying power's engine; borrowing power is (or should be) dependent on them.

We now seem to be in the position where we all might soon be picking up the pieces of the Fed's and the Bank of England's historic attempts to divorce borrowing power from earning capacity.

I'm on a fixed rate mortgage – are you, my dear Python?

The citizens are largely not so stupid that they don't realise the importance of wages. Economics should not, of course, be a zero sum game; my concern is that low wage growth resulting from executives' gluttonous consumption of shareholder funds combined with offshoring combined with mass immigration is turning it into one.

Your points on the Gini are well taken – dude, I sort of do try to read things before I cite them; but well taken as they might be, in my view they're wrong because you've had to create an absolute whopper of a logical fallacy to justify them.

Ho hum. To write that,

"The people in Knoxville have very different costs than others. In Knoxville, they are "happy" if their income is only half of those living in Manhattan. But Gini wouldn't make them look economically similar."

is (or might be) perfectly true; pity that your argument does not factor in the growth of income disparity amongst the citizens of either Knoxville or Manhattan.

Any thoughts?

And from my point of view, it is telling that you seem to have nothing to say about the possibility of the massive growth in executive compensation possibly being fuelled by productivity gains, and if that is the case why similar gains haven't percolated down to the ground floor.

Adam,

My apologies if the point of my equation was not immediately clear.

'Flexibility' is, in my opinion, a codeword for employment based on temping, short term contracts, etc. This lack of security does not, again in my opinion, benefit anyone other than employers.

And that's just another road to serfdom.

faultolerant April 9, 2007 at 10:58 am

Martin,

I'll admit to having read all the posts you've made in this thread…..and coming away thinking that you've posted some sort of addlepated communist manifesto.

That being the case, I'd like to respond to only one thing you've said: "Flexibility is…a codeword for employment based on…." yada yada yada.

OK, since when did a job mean security? A job is ALWAYS a temporary arrangement – it can go from piece work to decades, but it's still temporary. All you're doing is slicing time into something arbitraty: Below X days it's "bad" and beyond X days it's "good".

Not exactly a logical argument by any means.

Oh, and before you rant against temping and contracts, just remember that every job you do is temporary and likely involving a contract which is shorter than the term of your life, i.e. short-term.

Either you do what it takes to make yourself viable in the market or you elect to hold yourself hostage to the vagaries of economic change. This perspective isn't rocket science – it's pretty easy stuff.

One last question, why is it that benefitting employers is all you see and why is it bad? At the end of the day, someone owns those companies (either outright or via stock holdings). These "employers" benefit from flexible employment arrangements. If you own stock or a mutual fund, then you're an "employer"….and according to your manifesto, you're benefitting improperly from a flexible labor market.

I would presume that you also have people who work for you in one way or another. Do you have the paper delivered, have your lawn mowed, car washed, appliances repaired, eat at restaurants, et al, ad absurdum, ad nauseum? If so, then you are an employer of labor in very short periods of time for very specific jobs. Using your own logic, if you don't employ this labor for an unspecified "long" term, then you're just using labor to your own benefit, and that's bad, according to your logic. Right?

Security in employment is ephemeral, like castles made of clouds. If you want to base your life on it, so be it. I'll pass, thanks.

Methinks April 9, 2007 at 1:08 pm

"Nadia: price and wage freezes screw up signals when imposed by the state, it's a whole other story when you're talking about a business doing it internally."

It's not, Adam. It's exactly the same – only on a micro instead of a macro scale. Just think it through for a minute, you'll see that it's the same.

"How can you compare the income of people in Knoxville with those in New York City or San Francisco?"

EXACTLY! In NYC, the top income tax rate is near 50% (Fed, state, local), the average crappy apartment costs over $1 Million and an average, nothing special 650 square foot apartment rents for $3,000 – $5,000 per month. If you should decide to own a car, parking it will cost upwards of $4,000 per year. A comfortable income in Knoxville buys you a lower middle class lifestyle in New York. I know. I made the move!

Previous post:

Next post: