Let's Make Employment of Low-Skill Labor Profitable Again

Brink Lindsey of Cato is gathering academic essays on the topic "If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?"  I am by no means in the distinguished academic company that were invited to contribute, but I thought it was an interesting topic.  Here is my (uninvited) contribution.

The question of skills and the American workforce is typically tackled in only one direction:  that we need more high-skilled workers to meet the challenge of emerging industries and business models that are increasingly driven by technology.  A recent report by the OECD, and as summarized in the New York Times, is a typical example of this concern.  As Eduardo Porter writes in the Times:

To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind.

The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening....

“Unless there is a significant change of direction,” the report notes, “the work force skills of other O.E.C.D. countries will overtake those of the U.S. just at the moment when all O.E.C.D. countries will be facing (and indeed are already facing) major and fast-increasing competitive challenges from emerging economies.”

A lot of head scratching goes on as to why, when the income premium is so high for gaining skills, there are not more people seeking to gain them.  School systems are often blamed, which is fair in part (if I were to be given a second magic wand to wave, it would be to break up the senescent government school monopoly with some kind of school choice system).   But a large portion of the population apparently does not take advantage of the educational opportunities that do exist.  Why is that?

When one says "job skills," people often think of things like programming machine tools or writing Java code.  But for new or unskilled workers -- the very workers we worry are trapped in poverty in our cities -- even basic things we take for granted like showing up on-time reliably and working as a team with others represent skills that have to be learned.  Amazon.com CEO Jeff Bezos, despite his Princeton education, still learned many of his first real-world job skills working at McDonald's.  In fact, back in the 1970's, a survey found that 10% of Fortune 500 CEO's had their first work experience at McDonald's.

Part of what we call "the cycle of poverty" is due not just to a lack of skills, but to a lack of understanding of or appreciation for such skills that can cross generations.   Children of parents with few skills or little education can go on to achieve great things -- that is the American dream after all.  But in most of these cases, kids who are successful have parents who were, if not educated, at least knowledgeable about the importance of education, reliability, and teamwork -- understanding they often gained via what we call unskilled work.   The experience gained from unskilled work is a bridge to future success, both in this generation and the next.

But this road to success breaks down without that initial unskilled job.   Without a first, relatively simple job it is almost impossible to gain more sophisticated and lucrative work.  And kids with parents who have little or no experience working are more likely to inherit their parent's cynicism about the lack of opportunity than they are to get any push to do well in school, to work hard, or to learn to cooperate with others.

Unfortunately, there seem to be fewer and fewer opportunities for unskilled workers to find a job.  As I mentioned earlier, economists scratch their heads and wonder why there are not more skilled workers despite high rewards for gaining such skills.  I am not an economist, I am a business school grad.   We don't worry about explaining structural imbalances so much as look for the profitable opportunities they might present.  So a question we business folks might ask instead is:  If there are so many under-employed unskilled workers rattling around in the economy, why aren't entrepreneurs crafting business models to exploit this fact?

A few months back, I was at my Harvard Business School 25th reunion.  Over the weekend, they had dozens of lectures and programs on what is being researched and taught nowadays at the school.  I can't remember a single new business model discussed that relied on unskilled workers.

Is this just the way it is now?  Have the Internet and computers and robotics and complex genomics made unskilled work obsolete?  I don't think so.  I have been running a business for over a decade that employs more than 300 people in unskilled positions.  I will confess that the other day I came home tired from work and told my wife, "Honey, in my next company, I have to find a business that doesn't require employees."  But that despair doesn't come from a lack of opportunities to deliver value to customers with relatively unskilled labor.  And it doesn't come from any inherent issues I might have running a large people-driven service company -- in fact, I will say there has been absolutely nothing in my business life that has been more rewarding than seeing a person who has never had anything but unskilled jobs discover that they can become managers and learn more complex tasks.

The reason for my despair comes from a single source:  the government is making it increasingly difficult and costly to hire unskilled workers, while simultaneously creating a culture among new workers that short-circuits their ability to make progress.

The costs that government taxes and rules add to labor have been discussed many times, but usually individually.  Their impact is clearer when we discuss them as a whole.  Let's take California, because that state is one I know well.  To begin, the minimum wage is $9 (going to $10 an hour in 2016).  To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims.  For us, these add another $3.15 an hour.  We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour.  And the new California paid sick leave mandate adds another 45 cents an hour.  So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.

But these direct costs don't even begin cover the additional fixed costs of hiring employees.  We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed.  We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety.  In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.

In a smaller company, we don't have lawyers and a large human resource staff.  In fact, we tend to have little staff at all.  If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution.  In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.

Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year.  I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time.  And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours.  And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs.  But come on!  How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees?  But that is the reality of trying to run a service business today.  The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.

Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues.  But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work.  I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.

Until 2010, we never had an employee sue us.  We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues.  Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories).  So what changed around 2010?  Well, our work force composition changed a lot.  Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security).   However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company.  Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate.    But all eight of these legal actions were by these new, younger employees.  I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it.  They said that if I had fixed it, they would have lost the opportunity to sue.

I mentioned earlier that we had struggled to comply with California meal break law.   The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day.  They said they would sign a paper saying they had agreed to this.  Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I.  What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties.  The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of).  Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills.  This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.

Hopefully you see my concern.   I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits.  That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed.  As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees.  If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart

We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success.  If the government continues on its current course, it will become impossible to run a business that employs unskilled workers.  The value of the work performed will simply not justify the cost.  We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.

  • Trey Tomeny

    Very well stated. I have employed low skilled workers for over 30 years now and seen a number of them go from low skill to highly skilled managers to owner's of their very own businesses.

    But not lately. Lately it is more important to have managers who can deal with the tangle of regulations and now occasional legal battles. The manager who can avoid those traps is more valuable than the entrepreneurial types who can grow the business.

  • mogden

    Only a filthy plutocrat would complain about this. Now open that wallet and dump out some of that fat loot.

  • Vypuero

    May I suggest you peruse the following idea from Morgan Warstler, which can solve this issue:
    https://medium.com/@morganwarstler/guaranteed-income-choose-your-boss-1d068ac5a205

    But your overall observation is correct, and I doubt this idea will ever see the light of day, since it might actually work

  • Onlooker from Troy

    Thoroughly depressing, as I don't see this changing any time soon. Only a real collapse of the economy which starves government is likely to significantly swing the pendulum the other way.

  • brandonberg

    That's pretty shady. Did you file a complaint with the bar association?

  • Griz

    It is typical of the progressive mindset that everything requires top down direction. They cannot abide, nor even conceive of order emerging out of free choices of free people. Government regulation is a cancer growing in America and the world.

  • Mike Powers

    Seriously. It's like the people writing these regulations have the idea that all businesses are gigantic corporations like Microsoft, and run by Snidely Whiplash.

  • Mike Powers

    And, as you point out, the primary innovation of Uber and Lyft has been that they figured out a way to operate a business that doesn't have any employees.

  • Jim Collins

    Where I work is traditionally slow this time of year. We use this time to train on new software, equipment repair and to work on new processes. Last week I literally had nothing to do, so I was asked if I would rebuild some hydraulic controls for some of our equipment. Since I had injured my leg a few months ago and was just getting back on my feet, I was assigned a 19 year old "temp" Matt to be my gofer. I worked through the first rebuild, including fabricating a few steel high pressure lines by myself. The second rebuild was about 50% me and 50% Matt. Matt did the last two himself with me supervising. This was noticed by the Maintenance supervisor and he asked me how Matt was working out. I told him that he could probably do the next rebuild with little supervision, he learned quickly and had no problem following instructions. He then took Matt back to his office and talked to him for a while. When they finished Matt had to go to HR and fill out the paperwork to be put on full time. The kid was respectful, hardworking and smart, a rare combination these days. When you have somebody like that, it is worth putting in the time to train them.

  • Daublin

    Very well stated.

    As you say, low-skilled jobs are part of a person's education. There are innumerable things about working on a team that you just can't learn in a class room.

    As well, people who have jobs are often nicer, more level-headed people to be around. Even for someone who has few prospects for taking a high-skill job in their life, they're better off for themselves and for everyone around them if they are doing *something* for society.

  • Dave Boz

    "...a true two-class society -- those with high-skill jobs and those on government assistance"

    Indeed, this is the exact model preferred by many "progressives." I've had people tell me that this is the goal - if you're not worth $15 per hour, you shouldn't be working, you should be on welfare.

    Mission accomplished!

  • Gil G

    Simple: get rid of the minimum wage and welfare as well protection against frivolous lawsuits and you'll have an abundance of dirt-cheap labour.

  • Noumenon72

    So what this argument leads to is not the same old solution of "no minimum wage", it leads to "hiring preferences for 20-year-olds." Face it, if you're 40 and no skills you are not heading up the management track regardless. Our economy could use a law that's not slanted toward old people for once.

  • Not Sure

    Would you prefer that that "dirt-cheap labor" (as you so fondly call them) remain unemployed rather than earning an initail low wage which could be increased as the "dirt-cheap labor" (as you so fondly call them) learn skills that make them more valuable to an employer?

  • roxpublius

    "They said that if I had fixed it, they would have lost the opportunity to sue."

    Pouring some out for civilized society

  • obloodyhell

    Welcome to endemic, persistent 25% unemployment statistics....

    The liberals wanted us to be like Europe so badly, now we're, indeed, so badly like Europe...

  • slocum

    I'm a little more optimistic. Notice that most of Warren's complaints are about state of California rather than federal regulations. Not every state is like CA (or even close). And Warren's response, I believe, has been to reduce his footprint in California. States eventually do notice when they're declining relative to their neighbors and that business are exiting their state (or expanding elsewhere) and sometimes states are forced to take measures to improve conditions for business. California is a special case because its climate and natural beauty allow it to get away with a higher level of government stupidity -- but there are limits even there (the PIIGS also have Mediterranean climates and an abundance of natural beauty, but that combination has certainly not assured economic success in those cases).

  • mlhouse

    The minimum wage is a ridiculous argument, particularly the argument that paying low wage earners "helps" business because now these people have more money to "spend". Of course, if that is the case lets make the minimum wage $1500/hour and everyone can be a millionaire, fly their own private jet and live in mansions.

    Instead, my proposal would be going the opposite way with the minumum wage.

    For workers under the age of 20 who work less than 30 hours a week, I would propose a minumum wage of $5.00/hour. But these workers would be free from all FICA and unemployment taxes.

    For workers over the age of 20, I would maintain the minimum wage at $7.25 but all employees earning between $7.25 and $10.50/hour would not have to pay FICA taxes on their income.

    THis gives the low wage employees immediate after tax increases in income, maintains the link between their wage and productivity (no government intervention), and most important makes these lower productivity workers more competitive in the market place.

    We need to offer more work opportunities to people at the bottom of th eincome scale and for those just starting their working careers. Making it more expensive for employers to do this is a poor policy because it takes away that working start. If you are concerned about the wokring poor you cannot make policies that drop the adjective, and to a certain degree condemn them to a life of dependency rather than productivity.

  • irandom419

    I always that it was funny that even though the minimum wage is raised, there appears to be no decrease in welfare spending. Too bad you couldn't prove the employees that wanted to work thru lunch had consulted an attorney or something.

  • paul

    i am a PhD computer scientist, so highly paid, total geek. But my first work experiences were working in a bakery, at Cadbury's chocolate factory and on a farm. I don't remember how close these were to minimum wage. Cadbury's was unionized. The farm was owned by the father of a friend of mine and I just went there for a few weeks for fun; it was a total surprise when at the train station home he gave me an envelope with what seemed to be a huge amount of money at the time (but to be fair, since it was harvest time, we were working from 6am until maybe 10pm, running combine harvesters in the dark).

    And, totally off topic, the baker I worked for used to work on the Queen Mary in the days before planes took over. It never occurred to me but of course they had to bake their own bread every day. Not like they are getting deliveries. He would go back and forth between Southampton and New York every week or two.

  • paul

    also off topic, you have no idea how much fun it is to drive a tractor on the road at 14 (this is in the UK) when you are still 3 years off being able to get a "real" driving license

  • paul

    this is such a great proposal. so bad it will never get done

  • Gil G

    Or you could abolish the minimum wage in its entirety.

  • TruthisaPeskyThing

    I know that Nixon is vilified -- often for good reason -- but perhaps he did have the best idea on how to help the working poor: the earned income credit. Minimum wage laws have strong disadvantages (such as encouraging school drop-outs, discouraging useful internships, increasing unemployment, and primarily helping affluent suburban families with teens); however, most of us are concerned about the poor. The earned income credit is a much better tool because it helps those who both want to work (but might not have the skills for higher paying jobs) AND support a family. The earned income credit does not give the wrong incentive to teens nor reduces potential internships; one must support a family to benefit from the earned income credit. (When EIC, I remember thousands -- probably hundreds of thousands -- of teens thinking that they had a bonanza when they initially filled out their 1975 tax returns!)
    As an interesting note, I observe that President Obama has been persistent in his efforts to expand the EIC to help low-earning single adults who do not have children. Historically, although I have sympathy for anyone wanting to work diligently, I am less concerned about those who do not have children. However, single women without children may be emerging as a significant voting block, and I think that Obama wants government programs that especially help them.

  • billyjoerob

    The only thing that doesn't ring true here is the working through lunch thing. Had I been in a manager position and faced with that request, my immediate response would have been "no way." Lunch is like the equivalent of the sabbath to an orthodox Jew. That's just such an obvious violation and an obvious opportunity for liability.

  • mlhouse

    While in theory I don't disagree with abolishing the minimum wage, I also believe that is pretty bad politics.

    Regardless, in reality there is a "minimum wage" and I also believe it exists in the range of the current minimum wage level. What is this minimum wage? It is the wage were the net productivity of the worker (the value of that workers production minus their direct compensation) is equal to the supervision/administration cost of that employee. Low productivity workers are not "bad" jsut because they are not productive, they are also "bad" because they require a lot of supervision and direction on even the simplest of activities. A good example that I can give on this is the problems such marginal workers have getting their payroll information during the payroll cycle, and this usually extends to the other documents required to run a company. You have to track them down and spend a lot of extra time getting everything done with them.

    So, employees who produce at less than $5-7/hour simply cannot produce any net productivity and simply cannot be hired in any circumstances.

    But one of the main things why we need a lower, not higher minimum wage, is that these low productiviyt employees need to learn how to do these activities. Higher minimum wages simply prices these potential employees out of the market place and eliminates them from learning these skills to become productive members of society.

  • tex

    "Obvious violation?" In CA maybe, but not in general. During the hi-tech build-up w/ intense competition for programmer nerds, there was high demand & satisfied by mgt to give 'em free pizza & pepsi and such which they demanded & consumed while banging C++ on their keyboards.

  • tex

    Can the min wage entirely & get rid of regs making gathering data a problem (wasn't too bad yrs ago when I had 30 eployees - time clock; piece work maybe, etc).

    There is enormous wealth not being created in this country while millions remain unemployed producing nothing = bad, bad.

    To help the poor, do it directly, EITC, etc and not set a min $-productivity (min wage) under which people are economically worthless by law. That should not be hard to sell politically. There are other reasons for min wage, e.g. unions some of which have auto wage adjustments based upon them, Walmart who can reduce competition from small bus paying min wage, etc.

  • billyjoerob

    you might be right but he had them sign a form waiving a regulation. if it were so easy therre would be no point in having regs. plus this is hourly pay I think

  • tex

    Many if not most regs are there without a good point of having them. Many hi-tech nerds are (or were especially during the shortage and trying to crank out code) hourly.

    I formed a team of 4 developing an on-line, real time system for a large bank and we were hourly.

  • David Gillies

    The magic wand would be more usefully deployed in identifying parasitical employment lawyers like the one mentioned above and making the remainder of their lives painful, incident-filled and short.

  • mlhouse

    Well in the above I am not even talking about governemnt regulations, but the normal paperwork, administration, and supervision that any private company would need to do.

    While I agree that if there are people being unemployed wealth is not being created, the fact is that there is a very large segment of the population that is totally unemployable at any salary (hence my argument that there really is a minimum wage in reality). The "job skills" of this group of surplus labor are so minimal that just to supervise and administer them dwarfs their productive value. Sorry, but that is a sad fact.

    And I am a supporter of the EITC and other tax advantages given to low wage workers, but I also recognize the political reality of some form of minimum wage. Whether it is true or not, most people PERCEIVE minimum wage legistlation to be a device that creates some fairness in the labor marketplace between the big, powerful employers and the little guy making the lowest wages possible.

  • tex

    I don't see administration being the problem, though perhaps there are circumstances & particular jobs where it could be & those jobs would not be open to such lower wages.

    Long ago, demolition companies paid to tear down bldgs as they got their money from salvaging the wood, bricks, etc. Wages & regs (OSHA, labor laws, etc) have turned that around so that now you must pay to have bldgs torn down. Not much salvaging is going on anymore, but rather big machines that just crunch it in big jaws & drop it on a truck & put it in landfills. Long ago I had a summer job cleaning salvaged lumber, pulling nails mostly. All day in the hot sun in a field. Trucks would bring the salvage lumbar to the field for me & workmates to clean, sort & stack to be used in new construction. An unpleasant job no longer available. 2 black men & me, a teen white boy, with a known start, end & lunch time. I guess 1 of the men was a supervisor & reported hrs & such but I never saw him spend time writing or doing so. We were all on-time and worked hard. Certainly someone somewhere was aware of the quantity/quality of lumber in & out. Even the nails & metals were saved & sold for scrap by the contractor. Very tall grass over part of the large field was our bathroom. We did eat lunch in shade afforded by a shack that held our tools & toilet paper. One of the men brought a big cooler of ice water for us with paper cups & salt tablets. A man would come Fridays & pay us in cash in pay envelopes with hrs & rates written by hand. It is hard to believe administration of us was a big factor.

    Piece work has historically been easy to administer. Bring your bananas to the “tally man” & get paid by the bunch. Neither is low-hourly pay jobs so hard to administer. Foxconn employs huge numbers assembling Apple products. We don't have such low wage mfr jobs here because of regs including min wage, & welfare disincentives for low wage work.

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