A Different Kind Of Wage Inflation Heralds This Cycle’s End

Towards the end of long expansions (this one is the longest on record) things get tight. Factories operate flat-out and start raising prices. Good workers become harder to find and companies start competing for them with higher wages and other perks.

This story is about the “other perks” which, because they don’t show up in wages aren’t directly inflationary. But they do cost money, which means they shrink corporate profits nearly as much as would a big wage increase. From today’s Wall Street Journal:

Factories Tire of Wage Wars; Give Fridays Off, Spiff Up Bathrooms

Five years ago, entry-level candidates could expect to earn nine bucks an hour at a Haworth Inc. office-furniture factory. The economy was humming, but job growth was choppy, and wage gains anemic.

Things changed, though, as average unemployment in the counties where Haworth makes products like movable walls, desk chairs and storage cabinets tumbled from 6.3% in 2014 to 3.6% last year. Today’s newcomer makes $12.50 an hour.

Pay increases have become table stakes for those doing battle in this tight labor market. Consulting firm Mercer LLC found in a February study that the No. 1 human-resources risk executives face is excessive time required to fill open positions. The median cost to recruit an employee is $1,300, according to recent data.

If you’re a hiring manager and not prepared to pull out your pocketbook, prepare to suffer. And even if you are, prepare to suffer.

“This wage war isn’t winnable,” Ann Harten, Haworth’s human-resources chief, told me at the company’s Holland, Mich., headquarters. It’s simple arithmetic: Haworth’s revenue grows at about a 5% annual clip, trailing the approximately 8% in entry-level increases it has been dishing out.

The wage wars aren’t going away. As we chatted, a construction company offered jobs paying $13.50 an hour, a $500 signing bonus, benefits and a car to drive materials around the Grand Rapids area. A farm in nearby Zeeland offered $14 an hour to load turkeys into cages during the overnight shift.

Nonetheless, Haworth thinks it can respond without going broke, and a growing number of companies agree. By shaking up shift scheduling, investing in amenities for workers or offering more flex time, companies believe that treating blue-collar workers more like white-collar counterparts may convince them to sign on or stick around.

Haworth will put this theory to the test on May 19. That’s when about 300 employees at a plant that makes laminated tops of desks and conference tables in Holland start working a new schedule that allows a three-day weekend every other week, a golden benefit for people living near Lake Michigan during the summer.

“We’ve been desperately seeking the ideal of sustainable workloads,” Ellen Kossek, a professor at Purdue University’s Krannert School of Management, said. But “people always said in manufacturing you can’t do work-life balance.”

Her research indicates a similar logic is applied to sectors like retail, logistics, hospitality or transportation. You can’t assemble John Deere combines in your home office or serve a hamburger to a hungry customer after you pick up the kids. Conventional wisdom tells us the only way to improve your lot at a job that strictly adheres to a time clock is to demand a raise.

Workers have different ideas. Homebase, a San Francisco company helping local business manage time sheets, hiring and payroll, polled 2,000 hourly employees about important factors in deciding where to work. Pay ranked near the top, but respondents gave about equal weight to a positive work environment and schedules that fit their lifestyle.

Haworth has been experimenting with friendlier shifts, Ms. Harten said, as a way to attract workers as unemployment sank. The company found it worth its while.

Big changes aren’t simple or smooth. Haworth’s scheme includes 20 different shift patterns and a variety of pay variations, adding complexity when most firms seek simplicity. For example, one pattern has employees working a 36-hour week—three 12-hour shifts on Sunday, Tuesday and Wednesday. Then, they get the rest of the week off, before working four 12-hour shifts, Monday through Thursday, the next week and receiving eight hours of overtime pay. Rinse, repeat.

The trend towards more reasonable working environments in blue-collar industries is both a good thing and long overdue. But companies aren’t doing this because they want to. The alternative is an empty factory floor.

Flexible schedules and nicer bathrooms are expensive and their spread is an indication of how tight labor markets have become.

In other words, late-cycle dynamics are now in play, as wages and better-but-more-costly working conditions produce lower corporate profits which then collide with record high stock prices and soaring debt (both of which are also signs of late-cycle excess) to bring the expansion to an end. After ten straight years of debt-fueled growth, this shouldn’t surprise anyone. 

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