In an article for the online magazine Slate, Daniel Gross presents the plight of the many employees who have jobs and are fed up with them. I’ve been there, done that – a number of times in my life – so I can relate. Now I’ll give you the other side of the picture.
Appearing before the House Joint Economic Committee on Aug. 6th, Keith Hall, the Commissioner of the Bureau of Labor Statistics, reported that about 98% of employees in this country work for a company with 50 employees or less. He stated that there have been small increases in hiring by larger companies but hiring by small companies is flat or has decreased slightly.
Small companies are the economic engine of this country and they are not hiring. Until small company owners starting hiring, workers will continue to endure almost record unemployment. This administration has only just begun to address this issue with talk about a loan program for small businesses. For the past 1-1/2 years, they have been focused on the viability of big companies, those that produce 2% of the jobs in this country. This administration thought that by helping the big guys, they would be helping the little guys – a kind of trickle down economics. By the time the presidents and many vice-presidents at the big companies get done taking their share of the administration’s stimulus money, that’s about all that is left for the smaller companies – a trickle. Little wonder that the real engine of this economy is sputtering.
The reluctance of small business owners to hire is due to several factors: caution, fear, and uncertainty about future sales are top reasons. Others are: a lack of readily available business loans, excessive employee regulations and the burden of employee payroll taxes and benefits. Politicians like to make promises of a safety net for all employees, but who builds that safety net? Small business owners.
Many small businesses have had to lay off employees in the past 2 – 3 years and those layoffs jack up the unemployment rate on each business. In response to the rise in unemployment, many states also charge employers an additional tax surcharge. My company’s unemployment insurance rate has quadrupled in the past two years. If a small business owner hires an employee and business drops off after six months, the owner will have to let the employee go, which will only increase the unemployment insurance rate again. This self-defeating cycle of increasing taxes only makes small business owners more cautious about hiring.
In a downturn, small employers try to let those employees go who have the least productivity, leaving only the more productive workers to get the job done. As a result, productivity goes up. During downturns, the employees who have jobs are reluctant to push for raises and that, in turn, keeps a damper on labor costs, which helps increase productivity. There are a number of other factors that have contributed to increased productivity in the past decade, but the chief one is investment in technology. Better technology has enabled workers in a variety of industries to be more productive. Daniel Gross, the writer of the Slate article, seems to think that it is because employees are working harder. While that may be a minor contributing factor, people can only work so hard. Better tools produces the biggest sustained gains in productivity.
The Bureau of Labor Statistics recently released their preliminary report of productivity for the quarter ending in June. For those readers who like graphs, the first page of the report has graphs of productivity for the past 5 years. For the first time since 2008, productivity declined about 1%. In late 2007 and early 2008, labor costs increased dramatically, putting downward pressure on productivity. Does Daniel Gross think that the downturn of productivity in 2008 meant that workers were goofing off that year? When the economy gets strong or overheated, workers can demand higher pay for their work, which lowers productivity.
There is an old saying “I never got a job from a poor person.” While that may be true, it is also true that, for most of us, we get a job from a small business owner and most of those owners are not rich, just a bit better off than the people they hire. Many smaller businesses are funded in part by the equity in the owner’s home. The owner borrows against that equity to expand a small business or to fill in the cash flow gap that occurs frequently to many smaller business owners. As the real estate market tanked, many small business owners saw their home equity decline or evaporate, making banks less willing to extend a business loan.
What answers does each of our political parties have to this small business funding crisis? After 1-1/2 years of not thinking it was a problem, the Democrats will craft some complicated program that involves a lot of paperwork that small business owners will have to fill out. What do the Republicans offer as a solution for the small business lending crisis? Why it’s the one answer that Republicans give for all problems – lower taxes. Neither party could fix a leaking drain.
Innocent Investor 
Hi Steve — I read your article after following the link in Beth's fb status update. I'm in a big hurry right now, sorry, but I wanted to say first that this is a really good piece. One always appreciates the effort to base economic argument on evidence! I think we'd agree that economics holds itself out as a fairly exact science but that the only way it gets its exactness is by abstracting from real, diverse, complex experiences or by aggregating beyond the point where particulars matter any more. If 98% of jobs in the USA are in small businesses, it might be important to disaggregate “small business” a bit to find out what kinds of things are going on in that sector. How many are like the traditional small shop, with many suppliers and many distinct but loyal customers? Or, on the other hand, how many are firms that exist out of sub-contracting, with one or few suppliers and buyers? These two extreme examples would probably have very different issues around productivity.
The other question that occurs to me reading this is whether you are assuming that productivity gains come from either technology changes or working harder. It seems to me that, at least historically, improvements in technology have not eased the burdens of work — on the contrary, productivity gains result from both at the same time; technology may increase the unit output per worker or man-hour, which would be a measure of the aggregate effect of technological change. But the literature I'm familiar with on the labour process suggests that, again in aggregate, the technology itself has tended to intensify the labour process.
Just a couple of other observations: Gross doesn't pick up on this, but the effects he's describing at the level of workers in large corporations have been going on for over a generation. A news item that got a bit of discussion going over here recently pointed out that incomes for the lower 90% of Americans had been stagnant in real terms since 1973 — that surprised me, to be honest: I had been aware that the share of national income going to wages had been stagnant since then and that the inflation-adjusted value of wages had declined, but that would have affected mainly people earning below the median. This statistic suggests that the stagnation is affecting most of the business owners you are writing about here. I wouldn't want to simply fold them into the assertions that Gross makes, but it would go a long way to help explain the general cynicism towards a State and a party system that appears to be well inside the pockets of that other 10%.
Last, you wrote: “When the economy gets strong or overheated, workers can demand higher pay for their work, which lowers productivity.” That's the one thing I really disagree with. Before 1973 in the USA, pay tended to increase with increases in productivity; they have diverged since the late 1970s. Higher pay doesn't have any particular relationship with productivity or even with profitability. Job dissatisfaction, withholding labour, “going postal” — yes, these do hurt productivity.
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Matt,
this FAQ from the BLS explains the relationship of hourly compensation to unit labor costs, a factor in measuring productivity.
“increases in productivity lower unit labor costs while increases in hourly compensation raise them. If both series move equally, unit labor costs will be unchanged.” (http://www.bls.gov/lpc/faqs.htm#P01)
Productivity and hourly wages can both go up when the economy is strong, demand is rising, sales percentage gains are healthy and output is growing. In such an environment, the capital investment in better technology, which helps productivity, does not reduce the demand for labor because the demand for products and services is rising faster than the increase in capital investment can keep up with.
In an economy that has more manufacturing that the U.S. economy currently has, technology investments affect direct output on the factory floor. As the U.S. economy transitioned almost entirely to a service economy (80%) in the past 30 to 40 years, investments in technology affected indirect output, the back office support functions crucial to any direct output.
Your questions and comments prompted my blog post today.
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Matt,
You wrote “the literature I'm familiar with on the labour process suggest that, again in aggregate, the technology itself has tended to intensify the labour process.”
I wonder what you mean by “intensify”. Certainly, some automated manufacturing technologies that interface with human workers puts time/output pressures on those workers. Monitoring technologies put pressure on workers to perform. But there are many industries – mining, construction, forestry to name a few non-farming industries – where technology has greatly reduced the physical load on workers while enabling greater output per worker hour.
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