10: The 80-20 rule of American wages
Karl Marx was right about one thing: A constant tug-of-war exists between employers and employees over increasing their share of what he termed “surplus value.” For most of the past seven years, U.S. public companies held a stronger hand on the rope. Even the best employees - ones whose work produce the largest share of corporate profits — had a poor bargaining position. That’s no longer the case. If you have real skills — can drive a 18-wheeler or write imaginative, efficient code — you should be able to find a job.
For the first time since 2007, skilled workers have many choices. Even as Americans discuss how automation could produce mass unemployment, the market for employees who do the automating has improved. The market for those brains is so tight that employers are resorting to snatch and grab. Uber, for example, recently set up an engineering shop in an old chocolate factory near Carnegie Mellon’s National Robotics Engineering Center (NREC) and hired as many people from the research facility as possible, including its director. Uber’s new employees can still park in the same lot.
This workforce trend matters because the relative wage costs of capable people are the most reliable indicator of the ebb and flow of business operating profits — what most people call “the business cycle.” Anyone with management experience knows the 80-20 rule applies not only to customers, but also to employees. The most capable people are the company’s profit margin. If your enterprise faces serious time constraints, you give work to the already busiest team. They will be the only ones up to speed enough to have a chance of meeting deadline. Most of the extraordinary rise in profits since the credit panic of 2008/9 has come from companies being able to give more work to already busy employees. But that enormous leverage in operating efficiency is coming to an end. Productive employees will still be productive; but their cost will rise even if “job market” statistics say otherwise. Skilled workers will not only get a larger pie slice, but they will also use a larger knife.
While young workers in Deloitte’s Millennial survey say they are “not motivated by money” and more than 50% say they “would even take a pay cut” to find work matching their values, employees old and skilled enough to know the difference between work and life will say something very different. They will take Samuel Gompers advice and ask for more.
You cannot easily verify this change in the business cycle by government economic reports. The Department of Labor does not provide headline numbers to quantify the leverage of quality employees. The Department of Labor regularly releases numbers for job openings and turnover by industry, state and region. But, you can search the latest JOLTS report and not find even a mention of the term “wage rate.” In fact, the word “wage” is completely missing, even from the footnotes.
For productivity, the results are the same. The Department of Labor’s latest news release on productivity and costs makes no mention of wages.
To get any measure of the market share that productive people have and whether that share is rising, falling, or staying the same, you must resort to inference and induction using the official statistics for: One, nonfarm payrolls (public and private); two continuing unemployment claims and three, part-time worker for economic reasons in all industries.
Our algorithm indicates that the greatest leverage for profit-making employees since 1970 occurred in three periods: 1986 to 1990, 1995 to 2001, and Q4 2014 to the present. This calculation has been anything but perfect in its ability to forecast market tops. People made a great deal of money during these periods when profit margins were being eaten by the demands of the employees who produce them and, by our theory, stock prices should have gone down.
Our partial explanation for the failure of the model is corporate use of stock options. Those have allowed companies to provide their most valuable employees with real pay without diminishing the firms’ reported profits. To the extent that the market can provide the price momentum to have options represent actual incentives for employees, the profit margin cycle will be extended.
Where our approach has proven more reliable has been its assessment of “bottoms.”
The model has produced six “buy” recommendations: (1) July-September 1980, (2) May 1982 through February 1983, (3) November-December 1992, (4) March-May 2003, (5) October 2003 through April 2004 and (6) August 2008 through July 2010.
If everything follows the average (which, of course, it never does), the model projects another “bottom” period will occur sometime between July 2016 and June 2019.