This is an incredibly dishonest statement. Employees DO indeed share the downside of business income volatility by being forced to take pay cuts when their company is going through a rough patch. I see it all the time and I've had it happen to me.
Why are we pretending this is not the case?
Downside risk: you signed on to be paid S shares/month or P% of profits. You worked a month and the share price tanked. You already took the loss.
When you're a 20something techie living in the Valley, it really doesn't matter since you'll have 5 offers waiting in your inbox tomorrow. When you're a 50 year old blue collar worker with a family, a mortgage and maybe a medical condition, this kind of situation can ruin your life.
Most company owners don't readily share profits with their employees when their company is doing well but don't have a problem downsizing and cutting salaries across the board when they aren't doing so well. Since it's impossible to guarantee somebody income (even the best companies will go through rough patches), the only fair thing for managers to do is to share more wealth with the people who created that wealth when the times are good.
You seem to be confusing your wages with a bond or perhaps a call option. Just because you sold something at a price $X does not mean you own some right to continue selling it at the same price.
And if someone chooses not to keep paying you an old price, you have lost nothing - you simply have not gained as much as you thought you might.
Being a salaried employee protects your 50 year old blue collar worker from downside because the 30 years worth of savings he piled up is completely safe even if the company goes insolvent.
What I'm hearing is a different argument, to which your analogies with bonds and call options and forward contracts and whatnot are (I think) completely nonresponsive.
The argument goes something like this:
1. The success of a company is due to the work of its "ordinary" employees at least as much as to the genius or hard work of its executives or the generosity of its shareholders.
2. Ordinary employees are not adequately compensated for the work they do and the risk they bear. (This is primarily a claim in the realm of ethics, not economics.)
3. In particular, they share in the downside (via the likelihood of losing their jobs or taking substantial paycuts, if times are difficult) without getting much of the upside (via any sort of profit-sharing, or substantial pay rises, if times are good).
4. Yes, in principle, any employee is free to go elsewhere in search of better compensation (or other improvements) but in practice other jobs are often in short enough supply that there is little prospect of this.
5. You might argue that this means that they can't possibly be being underpaid because they're getting what The Market gives them, and The Market is the sole arbiter of what constitutes fair compensation -- but (a) if that's meant to be some kind of moral axiom then it isn't very plausible as such, and (b) if it's meant to be some kind of consequence of market efficiency, economists' optimality theorems, etc., then there are a whole lot of missing steps that look like they make desperately overoptimistic assumptions about what markets do.
6. The fact that employees are treated in this way means that in difficult economic times they are liable to find themselves in desperate situations. This is a bad thing. If employers were more generous then their employees would be at less risk of (e.g.) losing their homes, and society as a whole would be more stable and happier. (This is one sense in which it is possible for someone to be underpaid despite getting the salary The Market gives them: it may be that a higher salary would still leave the employer with a substantial gain from employing them, while making society as a whole better off.)
If we take the example of a Hollywood movie where the actors are paid a fixed amount for their work, then I don't think many people would disagree with yummyfajitas' analysis. If the movie bombs, they still got their pay, meanwhile the producers actually lose their capital. So it's not unreasonable that if the movie turns into a smash hit, the producers capture all the upside and the actors just get their fixed pay.
When we change the scenario to workers who are not wealthy Hollywood actors, it seems no one agrees with the analysis any more. Even though it's essentially the same relationships and principles at work. Why is this? If a business employs non-wealthy people, do the owners also take on a whole package of social issues beyond the basic contract of employment? Does our judgement change due to pity?
2. A movie actor is (I think) generally engaged on a limited-term contract to make a particular movie. That's quite a different situation from a (so-called) permanent employee who is (foolishly or not) hoping to go on being paid for an indefinite period.
3. The real complaint (as I understand it) is not simply "Employees should get a substantial fraction of the large upside if their company has a good year"; it's that it seems a lot of employees are getting neither that upside nor security and stability: they are in big danger in bad years but don't get the big gains in good years. Or, to put it differently, the primary complaint isn't that employees get exposed to a different pattern of risk from employers; it's simply that they are underpaid.
4. As it happens, I think there's a lot to be said for paying movie actors partly in proportion to the success of the movie. (Though I fear that in practice that would turn into a way to underpay them grotesquely, via "Hollywood accounting".) So I don't think I'm guilty of the inconsistency you allege. (Others might be; I don't know.)
However I think what's really happening in this debate is that one side is arguing about conditions for individual labourers, and the other about labor in aggregate.
The two can lead to very different conclusions. For instance high income tax is good for individuals who benefit from public spending, but it also consolidates the gap between those who already own the wealth and those whose only chance to acquire it was through higher income. So in a sense it's bad for 'the class'. Could probably think of a better example but hopefully you get what I mean.
Except that a blue collar family with children don't exactly "pile" up savings... and most of those savings are tied up in his house, whose value is closely correlated to local employment.
It's obvious that you are neither a blue collar worker, 50, or with children, so try to see things from that point of view instead of simply projecting your personal political beliefs
No, you can't. Government regulations and tax codes were purchased by the companies to eliminate competition and centralize capital, such that there is only one monopoly provider of car factory jobs in your area. The .com and .gov merger made the mess, they should have to clean it up.
If there was a competitive commodity free-ish market, then your plan makes sense. Sometimes that exists. Usually, very intentionally, it is prevented from existing.
Also, to the extent that it's hard to start a business because of government regulation (which is a large extent), the obvious response is to remove the regulations that make it hard to start a business. That would mean more people starting businesses, hence more new jobs available for other people who are currently out of work. Funny how the Reuters article doesn't mention that.
That's circular reasoning where this thread is concerned. People are saying here that corporations should be sharing the upside with employees. You are saying that since they are not, people should start businesses. You're changing the subject and giving the corporations a pass.
>to the extent that it's hard to start a business because of government regulation (which is a large extent), the obvious response is to remove the regulations that make it hard to start a business.
Sorry about the delay. Took me a while to wipe the vomit from keyboard.
Seriously, while these regulatory complaints are something that we tend to hear from people with certain political affiliations, I challenge you to cite references to actual regulations that are to any "large extent" preventing actual small businesses from starting. In fact, the implication in the Reuter's article is that businesses are doing just fine in the current regulatory environment. They are more profitable than ever at the expense of the worker.
And, I think the HN populace exemplifies the actual difficulty in starting successful businesses. I doubt many here will cite regulations as a key challenge. Instead, it's actual business problems, such as product development, finding market-fit, competition, marketing, lack of capital, inability to scale, etc.
Not nice.
That's part of what I'm saying, but not all. Another part of what I'm saying is that, if the premise is that current corporations are not sharing enough upside with employees, then one obvious response is to start a business that does share upside with employees. If that's really as big a deal as people are claiming, employees should flock to such a business. Only some of those who are now dissatisfied would actually have to start such businesses; the rest could simply choose to work for them because they treat employees better.
I challenge you to cite references to actual regulations that are to any "large extent" preventing actual small businesses from starting.
First of all, it's not just starting but growing businesses that should be less impeded by regulation. Sure, start a business with only a few employees and the burden might not be too bad (depending on what kind of business it is--see below); but hit a fairly small threshold number of employees and all of a sudden you have regulations galore that you have to comply with or a dozen government agencies will come after you.
As for regulatory barriers to starting businesses, here are a few off the top of my head: professional licensing, even for professions like hairdressing where any putative benefit to the customer is far outweighed by the costs of the barrier to entry; zoning laws that clearly go way beyond any public benefit; government sweetheart deals for companies like cable providers, which prevent all kinds of competition in the ISP arena. That's just from a few minutes of brainstorming; I'm sure there are plenty more examples.
the implication in the Reuter's article is that businesses are doing just fine in the current regulatory environment.
That's because they (i.e., existing businesses) paid good money for the current regulatory environment. That does not at all imply that said environment is good for potential competitors of those existing businesses; if it were, they'd be complaining to their politicians that they weren't getting their money's worth.
I doubt many here will cite regulations as a key challenge. Instead, it's actual business problems, such as product development, finding market-fit, competition, marketing, lack of capital, inability to scale, etc.
But all of these business problems are also faced by existing businesses. Markets are not static; a product-market fit that worked fine yesterday might not work fine today, and businesses that serve their customers well often have to reinvent themselves. The response of many existing businesses (the music and movie industries being two outstanding examples), instead of reinventing themselves, is to try to outlaw their competition. The fact that those businesses continue to make profits even though there are obvious ways in which they are not serving their customers well (let alone their employees) indicates that their political efforts to get the playing field tilted in their favor have been successful.
That's fine. But, what I'm saying is that's where you're effectively changing the subject. That is, it still doesn't speak to the current treatment of employees at corporations that employ millions of workers right now, and will likely continue to do so for the foreseeable future. So, why let them off the hook? It just comes off as a disingenuous red herring to suggest that the remedy is for folks to go out and start new businesses. We know that it's extremely difficult for any individual business to succeed for a variety of reasons. Yet, what you're saying is that to remedy this problem, many, many new businesses must do so in significant numbers. I'm an idealist, but that's just not realistic--particularly in the near future.
And, I read at least a tinge of disdain for workers implied in your comments, especially given the current environment that has seen more than its share of Ayn Rand talk and hostility aimed at workers. The sentiment comes off as one of "be happy with what you get, and if you don't like the way you're treated, then start your own business".
>it's not just starting but growing businesses that should be less impeded by regulation
Yeah, I was simply responding to what you'd written re: starting a business, but agreed that regulations pose some hurdle at all phases. I run a business. You're not going to hear me cheer-leading in favor of the current regulatory environment. I don't like it either, but it's not my biggest problem by miles. I'm sure it varies by industry type, and I agree with those that you listed. But, the decrying of regulations has generally been overblown, political buzz-wording in an effort to promote a particular agenda.
So, here we have to distinguish between small businesses and major corporations. When you hear the political-speak decrying regulations it's generally a tactic to use small-businesess as cover for large corporations. "There's too much regulation and it's killing our small businesses", which is cover for "abolish environmental protections, consumer protections, financial market protections, etc. so corporations can realize even more profit".
So, the term "over-regulated" comes fully-loaded. And, that's what makes me wretch.
Where we do intersect is in acknowledgment of the tilted playing field and pay-to-play political environment/markets. Whether it's through manipulation of the regulatory environment, ridiculous subsidies, or any multitude of tools, this obviously hurts the market, workers, and everyone--except of course, those who have the deepest pockets.
How does encouraging people to start competing businesses that treat employees better count as letting existing corporations off the hook?
Also, what alternative remedies would you propose? As far as I can tell from other comments in this thread (not yours), the main remedy appears to be to complain really loudly. If it's not realistic to expect lots of people to start new businesses, it's even less realistic, IMO, to expect complaining really loudly to make a significant difference.
I read at least a tinge of disdain for workers implied in your comment
Not disdain, just a reality check. I completely agree that workers at a lot of existing corporations should be dissatisfied with the way they are being treated. But I don't see much potential for change in just complaining about it. What these corporations need is competition.
here we have to distinguish between small businesses and major corporations.
Yes, this is a good point. However, I would offer a slightly different take on it. Small businesses, in my experience (a friend of mine runs one), just want to do business; they don't have the time or the resources or the inclination to expend effort in non-productive activities like playing political games. (That's one reason I think society as a whole would be better off if the average size of a business were considerably smaller than it is now.) The major corporations are the ones buying the regulations. But that means that much of the "protection" that we as consumers are supposedly getting from those regulations is illusory.
For example, lots of people claim that the financial crisis in 2008 was the result of lack of regulation of the financial markets. But if you look at what actually went on, there was plenty of regulation; it was just regulation that the major investment banks had written to favor themselves, rather than regulation that was written to actually protect the average person from having their retirement savings invested in junk securities that were made to look like AAA securities. As far as I can tell, that situation has not improved at all.
So when I say there should be less regulation, part of the reason is that the regulations we have are useless anyway. Small businesses are too busy doing business to engage in the kinds of shenanigans the regulations are supposed to protect us from; and major corporations can manipulate the regulations so someone else pays the price for the shenanigans anyway. If it were possible to have regulations that really did protect us as they're supposed to, I would be in favor of it; but I don't think we can, at least, not the way our political system currently does it.
When a corporation that has cut wages has recovered what benefit do employees receive in relation to the strength of recovery?
Guess why many of these unions play hardball?
Beyond that, it's not as if you're putting any of your own money on the table. Ownership (whether that be private management or shareholders) is putting their money on the table.
If you'd like a higher risk/reward level, negotiate for equity or other variable compensation.
Of course, your suggestion also implies a labor market balance that simply does not exist. The article is actually about the fact that corporations are realizing record profits by employing fewer people and paying less to those whom they do employ. It's a buyer's market for labor. Not exactly a strong negotiating position for the worker.
This thread. Otherwise, you are changing the subject. We're not talking about personal finance here.
I don't get it. If they have enough money to buy stock in their own company, they have enough money to buy stock in some other company as well. Even if the money comes from not having to pay union dues, which is what the post I was responding to hypothesized, there's still no reason why it has to go into the stock of the company they work for.
To advocate that--rather than participate in the upside--employees should simply buy stock in other companies is irrelevant and does not address this lack of parity.
The added notion that employees should invest in stocks instead of participating in union advocacy (that, in part, attempts to provide them with some parity) is just plain cynical and suggests a total lack of respect for the worker.
I mostly responded to this in responding to your post in the other subthread we're having, but I do have one other comment about this. I think there's a key distinction to be made here between two reasons why corporate owners/executives get more upside: one is a good reason and one is not.
The good reason is that owners and executives have to deal with all the business risks that you talked about in the other subthread: finding product-market fit, raising capital, how to scale, etc. Workers don't; they come to work, do a job, and go home. Like it or not, it's easier to find people who will do the latter than it is to find people who will do the former; so, since the former type of person is scarce, they can demand more upside in exchange for the use of their talents.
The bad reason why corporate owners/executives get more upside is basically the one that's been given multiple times in this thread: corporate owners/executives are in a position to take more upside by abusing the corporate governance structure, whereas workers are not. (Unions were an attempt to stop this by giving workers more of a voice in the corporate governance structure; unfortunately, in many cases, the unions have ended up with exactly the same governance problems as the corporations they were supposedly fighting against. I saw this firsthand when I was working in the auto industry.) In fact, in many cases it's executives manipulating the structure for their own benefit at the expense of the owners, not just the workers. This is easier now that many "owners" are large mutual funds rather than individuals holding large blocks of stock, so the theoretical model of shareholders controlling the company by voting their shares bears little resemblance to reality in many cases.
One reason why I like the "why not start your own business?" response to this issue is that I think a larger percentage of people really are capable of dealing with the business risks themselves, instead of letting someone else (the owners/executives of the business they work for) do it. I think our society would work better, overall, if we had a larger number of smaller, more diverse businesses as opposed to a smaller number of large, monolithic corporations. The large, monolithic corporations are a historical artifact of the way the industrial revolution happened, and I think that in many ways they have outlived their usefulness.
Can you justify that? It seems like one of those statements that is designed to appear correct without provoking concious analysis. Kind of like "truithiness" [1]. Isn't there rather a lot of evidence that properly implemented profit sharing results in more motivated, productive employees?
So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only.
Profit sharing works great when employees have the ability to significantly affect profits. Traders/hedge fund managers are a great example of this. For manufacturing employees, a piece rate (rather than hourly rate) would be a similar way to create such incentives.
In another comment, someone asked about the executives who get paid and then "only have upside", as if that somehow proved that employees should also get an upside. Not so: executives are the last option: lower wages + profit sharing in upside only. Employees are—literally—taking the first option. If they want the last option, they can become executives. We don't have a legally-mandated cast system in this country, anyone who is competent can become an executive and take option three.
And the wages really are lower for executives who only have upside potential. If you are an executive (not a manager, an executive) you can either run your own company, or run someone else's company. If you run your own company, you've got upside and downside risk. If you run someone else's company, you have (much) smaller upside potential, but that's compensated by: (a) lower, but guaranteed, wages + (b) no downside potential.
It's a reasonable trade for a lot of executives to make.
Employees, at least those earning income from real labor, always share the downside of business income volatility. In fact, it's arguably an outsized share. One simply needs to observe the various employment metrics, and their rate of change. Particularly those tracking layoffs, discharges, and other involuntary separations initiated by employers.
What's perhaps even more illustrative are the comparisons of job requirements and starting salaries for positions with similar responsibilities; found in employment advertisements before, during, and after a "business cycle".
In fact I've read several studies showing that people who happen to graduate and enter the workforce during the nadir of financial crises earn, over the course of their entire career, substantially lower wages as compared to people who simply happen to enter the workforce at any other point of the business cycle.
Let me put this another way: no one is really entitled to a job; not in the way their entitled to their properties, which have a _title to their name_. Capital, on the other hand, risks its very entitlement. Employees don't have any assets seized during a downturn. If they wanted to share in the risk and return, they could have bought stock.
Volatility's a red herring. Look at the 3-decade trendline.
Arguments about short-run volatility that don't address this fact are hand-wavy.
(For the sake of argument, say his work and output has not changed at all.)
If you're being anecdotal, you can justify whatever you want. In the aggregate, wages have lagged productivity, corporate profits have skyrocketed while US wages have stagnated relative to inflation.
Most employees (other than trying to be more productive) have no control over what decisions business owners make (such that they roller coaster between profit and losses year by year) so why should they share the downside? It's not as if they get the same magnitudes of rewards as board level staff do to allow them to buffer themselves financially for downturns.
Left to their own devices there are no morals in business. The only fiscal responsibility is to keep profits high.
> Most employees ... have no control over what decisions business owners make ... so why should they share the downside?
You mean the Human Resources. You don't complain when any other resource is sold or retired to save money, why should the business care specially about this resource type?
>You don't complain when any other resource [other than Human Resources] is sold or retired to save money
It's funny that you point this out. Our treatment of and relationship to corporations is interesting. On one hand, we want to treat them as faceless entities or machines that have only the fiscal responsibility of generating profits. In this view, their impact on "regular" employees is an unfortunate by-product of this responsibility and no-one's fault.
On the other hand, we grant them full person-hood, where convenient. Further, the profits they generate do frequently accrue to actual human beings.
So, the corporation seems to have become nothing but a tool (or weapon) for redistributing wealth in ways for which no-one should be held accountable.
> why should the business care specially about this resource type?
Because people are often hurt when they are "sold or retired to save money" whereas, so far at least, other "resources" don't have that capacity.
This is also the reason why, generally, people cannot be explicitly bought or sold as other resources can. This is widely considered a Good Thing, although indeed an idealized amoral business (or its owners) might well think it unfortunate.
No it was unfortunately serious.
> people are often hurt
If you still believe that any business still cares about this you haven't been paying attention. If you are not at the top, you are just a cog in a machine and will be treated as such. You are just a human resource, a resource that is one of the largest, if not the largest, singly money drain.
As I said, left to their own devices a business does not have any moral duty and the only fiscal duty they pursue is maximizing profits for themselves.
Your question (which, I now take it, was intended to express businesses' attitudes rather than your own) was "why should the business care?". I agree that they commonly don't, and that there are structural reasons why they commonly don't. But I think most would say that they should.
Yet, a very few concentrates a bigger share every year.
Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.