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

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,

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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.

Margaret O'Hanlon is founder and principal of re:Think Consulting. She has decades of experience teaming up with clients to ensure great HR ideas deliver valuable business results. She has worked with early-phase and Fortune 500 companies, as well as universities, non-profits and local firms. Before she founded re:Think Consulting, Margaret was an Principal in Total Rewards Communications with Towers Perrin. Contact her at mohanlon@rethinkconsulting.com.

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5 Comments on “Big Profits But Paying Poorly: Why Is This Today’s Business Philosophy?

  1. Today?

    it’s always been like the this. there is never enough money in the world for the rich

    1. No, no it hasn’t always been like this. If you notice he even explains that it wasn’t always like this. Post WWII the rate of productivity was connected in lock step to the cost of labor. Meaning as each unit of labor became more efficient (producing more with less) the cost of that labor increased in equal measure. So if you efficiency went up 100% you got paid 100% more.

      NOW (post 1960) we have so much automation that a huge section of low skill jobs are gone. Those people who can’t afford to get a new certification or degree are stuck making less money because the companies looking to hire people aren’t willing to pay them more when they also have to TRAIN them. What that means is that as your productivity goes up your pay doesn’t. Back before 1960 when you were producing more your company was making more. Now when you are producing more the company is still trying to recover the cost of training you.

      1. um, that’s my point

        post wwII era was just an anomaly, now things are heading back to the way they always were

  2. Higher returns on capital do NOT equate to job growth when improvements in technology result in a net loss of jobs.

    We favor capital in our tax systems in the hope that higher returns will create jobs.
    It is an illusion that keeps taxes on working people higher and now lowers their wage growth.

    Isn’t it about time that capital starts paying equal (or higher) tax rates on their returns?

    1. So you’re saying that when Google builds a new headquarters that doesn’t produce more jobs? What about when GM builds a new manufacturing plant? Or when Zappos opens a new call center? All of these are CAPITAL INVESTMENTS (meaning they are investing in new capital). All of these create new jobs. They do NOT create jobs are the rate they USED to create jobs, that is true. But they still create jobs.

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