Mix Shift?

The graph is large, so you will have to click through to it, but basically it shows employment losses and wage changes by industry in the US from 2008 to 2009.  What confuses me is that all these industries show fairly large hourly wage gains, with gains the largest in certain sectors with the largest employment losses.

I come up with one of two explanations:

  • Labor laws, union contracts, and other structural barriers in the economy make it difficult to cut wages in a recession, which in turn probably makes unemployment worse
  • The average wage gains are due to mix shift - companies preferentially lay off newer and less skilled employees who make lower wages, shifting the average wage mix upwards.

Not sure which it is.  Probably a bit of both.

  • Don Lloyd

    Warren,

    "Labor laws, union contracts, and other structural barriers in the economy make it difficult to cut wages in a recession, which in turn probably makes unemployment worse
    The average wage gains are due to mix shift – companies preferentially lay off newer and less skilled employees who make lower wages, shifting the average wage mix upwards.
    Not sure which it is. Probably a bit of both."

    The fundamental problem faced by an employer in a recession is a production capacity in excess of what is needed to produce the limited output that can be sold at a profit. For direct labor, a variable marginal cost of production, even if wages could be reduced without layoffs, that would still not solve the problem of excess production capacity. The only logical remedy is to sequentially lay off the labor units with the largest ratios of marginal cost to marginal productivity until the remaining production capacity is just adequate to support sales.

    In the case of fixed cost labor, such as overhead not directly tied to production capacity, wages CAN be cut to a degree limited by the opportunity costs faced by the workers which the employer wishes to reain.

    Regards, Don

  • The labor econ literature would drill down to ask whether the folks being laid off had general training or firm specific training. The standard story would be that those folks with firm specific training are "protected" in a downturn, because they are already being paid a wage below their productivity. Those with general skills generally are paid wages at their productivity. Whether general or specifically trained workers have higher salaries is an empirical question.

  • Norm

    How about overtime for the remaining workers?

  • Don Lloyd

    "The labor econ literature would drill down to ask whether the folks being laid off had general training or firm specific training. The standard story would be that those folks with firm specific training are “protected” in a downturn, because they are already being paid a wage below their productivity. Those with general skills generally are paid wages at their productivity. Whether general or specifically trained workers have higher salaries is an empirical question."

    This sounds right. As a worker gains experience over time, part of that experience will be general, and part of it will be specific to the employing firm. It is to be expected that an experienced worker's pay will tend to rise mostly with the general experience as the specific experience will be of less value to another employer, reducing the worker's opportunity cost of remaining with the employing firm. This should bias retention towards the more experienced (and higher paid) workers and the layoffs towards towards the less experienced ones.

    Regards, Don

  • I imagine that employers consider relative value. Between separation bonuses for departing executives, and costs to bring in a replacement when or if conditions rebound, it makes sense that a company will let go production hands first. As Don Lloyd pointed out - when you run into trouble finding buyers for your product, you have immediate use for fewer of the people that make that product.

    "The ship don't go where the Captain don't steer." It seems harsh, but it is the senior people that are more likely to rebuild an effective organization if demand returns. New companies experience growth problems - and often fail - not because they cannot find good production folk, but because the infrastructure, the policies and senior administrators and executives are so difficult to find and bring into a functional culture.

    Then, too, say you shut down a division. Take a VP at $300k, 4 managers at $200k, and 8 assorted foremen and supervisors at $100k, and 200 workers at $25k. 300 + 800 + 800 + 5,000 = $6,900k. Avg: $32,394k. Drop all levels of authority, and the number of wage-earners will make the average change more than the number of executives affected. Couple that with the relatively lower cost and briefer time to replace wage-earners, and you have a moral issue faced by anyone hiring or firing people to build their product or provide a service.

    I would contend that McDonalds and Burger King *artificially* overstaff many restaurants to provide jobs as a form of community service. Let their income drop, from fewer people eating there, and it will be extra burger flippers, extra order assemblers, extra counter help that will be let go first. A competent manager can replace staff simply - they get enough turnover to stay practiced in the best of times. But finding or training managers that keep customers and workers from being disgruntled, and the cash flow under control and expenses on target, that is tougher to replace and more precious when times are tough.

    It sounds - and is - heartless about how downturns unfairly affect wage-earners. Yet it will be those with jobs to offer that will be the more important resources if and when a recovery ever comes about.