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| Courtesy of Wall Street Journal |
Yes, unemployment is a complex and multi-layered issue, with a mixture of long-term structural factors and short-term economic factors. As labor productivity goes up, businesses can use fewer staff to generate a profit; labor is less mobile than it used to be because many people are stuck in homes with underwater mortgages and cannot move; the housing market (and therefore construction) is stuck in a medium-long term rut; our educational system does not produce workers with the high-tech skills that many businesses need (also in today's WSJ: U.S. Business Leaders Press Senate Panel for More Work Visas); executives are uncertain about the effects of Obama-care, Dodd-Frank, etc, etc.
However, I wonder how much this might have to do with incentives that are out of wack. Corporations focus on setting up a proper compensation system so that senior executives' incentives are aligned with shareholder's incentives --basically CEOs and other fat cats are paid very little in wages and receive most of their compensation in stock or options. Executives make more when profits go up. But regular employees simply receive a wage, and executives have every incentive to reduce costs (i.e., other people's salaries) as much as possible.
My first question which has nagged at me as I studied corporate governance: why the big difference between senior executives and other employees? In the end, aren't they all supposed to make an important contribution? As a customer, if I go into a Starbucks, the performance of the guy making the coffee is much more important to me than the performance of the CFO--why does the corporate governance structure make a qualitative distinction between the two? Why are a few people given the privilege of having their compensation "aligned with the shareholders' interests" --which means they may have earnings measured in the millions-- while others have earnings measured in the tens of thousands, and can get canned at the drop of a hat, by some brilliant new cost-cutting executive?
Executives have a big incentive to cut costs and get rich in the process. But isn't there some benefit to having long-term stable, loyal employees, to treating employees as valued partners, not to mention the "Corporate Social Responsibility" that many corporations preach in their annual reports? Perhaps so, but my sense is that these are factors that will generate benefits over the long term--years and decades-- and require patience and skill to capitalize on. Cutting heads, if it can be done without driving customers away in the short term, generates a quick jump in the bottom line. Traditionally, another big disincentive to laying people off wholesale were the unions, which have all but disappeared in the private sector. No, I do not advocate a system like Spain's, where unions made it nearly impossible to fire under-performing employees, thus leading to an 10% structural unemployment rate (now around 20% due to the bursting of their real estate bubble). But look at the growing discrepancy in pay between executives and line employees in the US, look at the gap between rich and poor, look at corporate profits, and look at the unemployment rate. And then maybe take a look at the tax structure.
Executives who get paid mostly in stock or options make most of their income from capital gains, which are taxed at 15%. Other employees get salaries, which are taxed based on a sliding scale, with a maximum rate of 35% (25% for incomes between $34,500 and $83,600). This is the U.S. government doing its part to make employee wages even more expensive for corporations, relative to what they pay executives, therefore increasing the incentive to use salaried employees as little as possible. Is this really what we want to be doing?
Why can't we have a fair, simple tax structure which values work as well as deal-making? And why can't we have an informed, well-educated work force? Is this too much to ask?
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