Why is the market reluctant to raise wages?

Great Debates
41

And I never said there wasn’t. What I did say was that companies could locally eliminate the shortage - for them - with proper measures.
From what I understand you as saying, there is massive turnover in the industry but the drivers who move do not get any or just small raises.
WalMart appears to have conquered the turnover problem. You sound surprised that they do this by paying more. Anyone in industry who isn’t a total idiot knows that paying under prevailing wages is going to increase turnover - though usually not to truck driver levels.
The shortage would make me expect that the number of truck driving schools would increase, thus supplying more drivers to the market. I can’t find any data on this. Truck driving school is not all that long, so I’d expect the time to increase the pool would be a lot less than the time to increase the IT worker pool, say, to ease that shortage.

I’m sure truck driving companies are very sensitive to labor costs. But are they as sensitive to the lost business from not having enough drivers? Are they sensitive to having perhaps a less competent set of drivers? Yes, all this could be computed, but my experience is that managers are driven far more by easily measured things (like wages) as opposed to harder to measure things like missed opportunities and poor quality.

As an example, I saw a plaint by a CIO about the labor shortage affecting his company. It was a real shortage, but he brought it on himself by overly constraining his candidate pool. He only wanted people with specific competence in a set of applications which were popular at the time. Increasing the pool by training was out of the question. Shortages can be self-inflicted.

42

I don’t know what you mean by public workers being overpaid, but if you remember a while ago people said that the problem with car companies was that their workers were being overpaid. So maybe the “issue” is with unions, not the difference between public and private companies.
Where I live most people are property owners, property tax increases are limited, and the state doles out money for schools according to an antique formula.

43

As I mentioned, I had access to the numbers, not anecdotes, and the things you mention definitely happened. The management team tried to move salaries into line with performance (the person getting more money might get a lower rating than the person getting less) but with small salary pools it is hard to do.
The Bell Labs method was that each person brought a certain amount of raise money into the pool for the year, and that raise money could be moved to “more deserving” people. So that helped. But our department, mostly computer scientists and EEs, got more money than the department full of chemists, who were not happy about this.
We did the best we could, but we were never totally satisfied as to how it came out. Though things were better in the early '80s when the average raise was 10% or so thanks to inflation.

44

As a person who deals with this professionally, I can tell you the easiest thing to cut and make an immediate noticeable effect is payroll.

Also we had a situation in the late 90s where jobs were plentiful and employees were getting very picky. And rightfully so, it was a employees market.

The would turn down jobs and it resulted in employers often creating two jobs where only one was needed, because of the pickiness. In the Great Recession, this deadwood was vastly washed out and I saw a lot of the people being laid off in jobs, that had no real good justification to exist.

You just saw a major government shut down and most people didn’t notice much.

The Great Recession left a lingering fear not seen since the Great Depression, so people who SHOULD be jumping jobs and demanding more, are not. I see this as my job is to help people off welfare and into jobs.

And right now, a problem I’m seeing is people in lower level jobs are being offered chances to move up but are not, thus the entry level is getting blocked. This explains the paradox in placing needy people in entry jobs with very low unemployment.

A further consideration is outsourcing. In accounting every firm I’ve dealt with that is outsourcing is getting better results, better books kept, and much lower costs. Part of this is due to computerization which allows a controller to handle more than one company effectively.

I deal a lot with hotel workers and clubs and that is simply due to massive staff cuts. I know of most of the clubs, have all but eliminated non-managerial positions and simply use temp agencies to fill front desk, waitstaff, doormen and cleaners.

The clubs will complain but the bottom line is the service is the same and the costs are much lower.

Employees also like this, because if a boss at the Roadrunner Hotel, gives them the slightest attitude, they can simply refuse to go back and the next day do the same job at the Acme Hotel for the same pay from the temp company.

Since the Great Recession there really has been a fundamental change in hiring and keeping employees, at least at the lower tiers, which is mostly what I deal in.

45

No.

Wal-Mart, as I already said and you seemed to miss, again, does not hire new workers. Looking it up again real quick… they require around three years previous experience and no traffic violations. They’re skimming some of the cream of the crop with their job requirements.

Just to make sure it’s clear: Not every firm can skim the most skilled veterans. Once the most skilled workers are already hired, the next firm needs to hire a different set of drivers, since the first set has already been taken. But even beyond that, most firms can’t afford Wal-Mart wages for the drivers, or especially Wal-Mart prices on the other end. What’s interesting about Wal-Mart is that they have developed their internal supply logistics to a level practically no other retailer can match. Part of that method was integrating a good chunk of their delivery operations into the firm itself. And that logistic mastery, of course, is why you’ve actually heard of Wal-Mart, and haven’t heard of so many smaller dedicated trucking companies. Wally World is very good at what they do.

Other transportation firms don’t work like that. Firms are not perfectly identical with how they’re structured, or in what they’re able to afford.

This really isn’t very hard. It’s not “surprising”. It happens all the time. There is more than one market niche that needs to be filled. Not every firm can use an identical strategy. Not every firm can exclusively hire high-quality veteran drivers at higher wages.

There is no requirement for “rationality” among firms for them to settle into an strategy that approximately maximizes their profits, given their constraints. Firm managers do stupid shit all the time. But surviving firms in tough industries tend to make reasonable decisions, given their constraints, most of the time. Especially about high ticket costs like wage and labor decisions.

If they don’t, the firms simply go out of business. We’re not talking a Ma Bell monopoly here.

Many, many, many businesses fail. They fail all of the time. Sometimes it’s a lack of wisdom. Other times it’s just plain bad luck. The ones that survive do so because, either by reason or by accident, they have settled into a local maximum that keeps the bills paid despite all the other choices their customers have. If there were mountains of Franklins on the ground to be picked up by eating the enormous marginal expenditure of reducing turnover, then one firm or another would stumble into that strategy. Not necessarily by reason or wisdom. Dumb luck is sufficient, given how many firms there are. People try things. Sometimes they work. And if it does work, and there are mountains of cash to be won, then other firms will copy the strategy until… there are no more mountains of cash to be won.

A firm can be stupid. Industries tend to be smart.

There is a reason for this.

46

No, these days large firms are contracting with them as “independent contractors” even though their ‘contract’ is to work full-time or more for the one company. And that turns organizing into collusion.

47

I was going to come back and post exactly this. My contention is not that there is no shortage, but that any individual firm can do things that will eliminate the shortage for them. Which is exactly what WalMart seems to do. WalMart is not in the habit of overpaying workers out of the goodness of their heart, and I rather suspect they know exactly the costs and benefits of their pay scale, and choose to pay what they do because it is profitable for them.
Do other companies maximize their profitability by paying less and losing business due to the lack of drivers? Fine. They should just stop complaining about not being able to hire enough workers.

Or how competent they are at running their business.
A small business owner wrote to a hiring blog I read complaining that he couldn’t hire enough workers and that it was unfair that his competitors paid more and were able to hire. He also said that he couldn’t afford to pay what they did. He didn’t get much sympathy.

Sure. But are they successfully filling that niche? If their niche requires a certain number of lower paid drivers, and they can’t get them, perhaps their niche isn’t viable.

Being at a local maximum implies that small movements would decrease profitability. I don’t see that - it seems quite plausible that a firm could be profitable though not maximally profitable at a certain point. I worked for Ma Bell, and my center became more efficient (not more profitable, since we were a cost center) by making small changes.
As I said before, you are assuming that the size of these mountains of cash is obvious. But some costs are easy to measure and some are very hard to measure. I suspect WalMart, which has to deal with turnover in its stores also, has better measurement tools than Joe’s Trucking Company. I’m not sure if it is fair to call Joe irrational but he might be using a non-optimal strategy due to lack of information. Or lack of ability to process the information he has - WalMart can hire people to look at this problem that Joe can’t. I’ve done data analytics, and WalMart is very impressive. As you said.
You don’t have to tell me about irrationality. My daughter is a marketing professor specializing in judgment decision making, and we have a couple of papers applying this to engineering - which you’d think would be the last refuge of the hyper-rational.

48

Wow, that’s a fascinating insight. Are they worried about failing in a new job? Are they comfortable where they are?

I saw the same kind of thing happen after the 2001 recession. Not with hiring so much, but with things like trade show attendance. Companies would attend with 20 booth exhibits because they always did - when the recession hit and they couldn’t afford it that year they cut back, and saw no ill effects, and so never came back.
Say more., please.

49

This is what I was going to say:

Shareholders and Wall Street investors are huge factors that plays a vital role in all kinds of trends. Shareholders don’t like corporate executives who increase wages, and will punish them, because any rise in wages means less money for shareholders.

50

Makes perfect sense to say that.

As I said before: The complaints are job advertisements, especially if they’re picked up by a major newspaper. “We have jobs at such-as-such a wage, and we’re hiring.” It’s already discussed, further upthread, that the wage numbers cited in that article are probably BS. But it’s still clearly an advert. The job advert sounds better with somewhat inflated numbers.

If you want to tell them “raise yer pay and kwit yer bitchin”, then well and good. Perfectly sensible. But there’s still a sharp truth to the shortage: they can attract those workers if they raised their pay high enough – obviously – but they simply might not be able to afford to do that. It could easily put many of those companies under. Which leads directly to this point:

That is possible.

If that’s true, tho, then why hasn’t it happened already? A person can make the argument that the optimum position in the market has shifted, and the industry as a whole has not yet responded sensibly to that shift. Firms don’t respond instantaneously, by magic, to underlying shifts in their business environment.

But most of the time, it’s the wrong way to bet that the people whose very livelihoods depend on getting the answers to these questions right, are collectively getting the answer wrong – at least in a tight market like trucking. (A monopoly is an entirely different story.) A single firm can fuck up, sure. But practically everyone in the industry? If their niche isn’t viable, then those firms will adapt or fail. The ones that survive will be sitting on the new equilibrium. If there’s some profitable secret sauce that an outsider knows, that the ENTIRE industry is missing, then there’s a damn fortune to be made as a consultant. Or a hundred fortunes to start a business proving those fools wrong, so lacking in “competence” as they are, as you style it.

But if someone were to come up to me, raising money for a new trucking operation on the premise that paying a little more to avoid the 80-90% turnover of the largest carriers is a surefire investment winner, I wouldn’t give them a dime of my money. And neither would you.

If you want to interpret things in hyper-literal fashion, yes.

If you want a hyu-mon conversation, you need to allow a little more flexibility. Mathematical equations can have exact solutions. The maths we use to model these kinds of markets often have exact solutions. That doesn’t mean that a real-world firm is exactly, perfectly, precisely on the infinitesimally tiny spot that would perfectly maximize profits. I did, in fact, use the word “approximately” in my post, and it’s absurd to endlessly repeat qualifying statements. Epsilon movements in the right direction might increase profitability. Sure. That’s what “approximately” means.

But almost certainly not medium or big movements. Yes, markets shift over time. But the general way to bet is that the firms that are currently still alive are there because they outcompeted the others that chose wrong. If the optimum point were far from where the industry sits, then some lucky firm would’ve snagged that place and pushed their competitors out of business. It’s a dynamic, evolutionary process. The winner gets the spoils, and the losers adapt to mimic the winner. One of the strange facts about evolutionary processes – and this comes up in biology, just as it does in economics – is that static models of shifting equilibria are often the easiest way to understand dynamic processes.

It’s possible that their niche isn’t viable, and they’re about to die. But this shortage has lasted a very long time. The better way to bet is that the firms that exist today, at least most of them, are in pretty much the right spot to be in, given the constraints they face. A firm can be dumb, but the industry will be smart. I’m not saying anyone should shed a tear for those poor employers who don’t want to pay higher wages. But it’s very likely to be true that they sit where they do because that’s pretty much the place they need to be to survive. If they could do better at a different spot, then by and large they’d be at that different spot. If there were some firm earning profits far in excess of the opportunity cost of their funding, other firms would have moved in the siphon away those profits. That’s the way it’s going to be most of the time.

I’m not going to bet my money that a different strategy would make bank here. I’m not alone in that.

51

A lot of it is what you say, combined with games about permanent employees/contractors and that “modularity” that I spoke about upthread.

They won’t raise wages, but they’ll hire a contractor to help, as that’s not “payroll”, but operating expenses. Or they’ll let that person leave, and then hire someone new at the rate they should have been paying the other guy, because “we can’t get anyone qualified for less”.

Basically the people doing the bottom-line analysis aren’t aware of the shenanigans at the lower levels w.r.t. hiring in order to keep their metrics in line.

52

Businesses are in the business of making profits, and if they have investors, which most do, those profits have to grow over things like inflation and taxation, which isn’t the easiest feat to achieve.

Going back to Econ 101, labor is often the largest intrinsic cost, which exerts a downward pressure on wages. Even if the demand for labor is high, there is the simultaneous necessity to keep labor below a point at which it can no longer be profitable. Wages increase when unmet demand results in lost income and lost economic opportunity. Most businesses find it hard to make the kinds of forecasts that justify pumping up wages. And from a purely micro-economic point of view, this is also the argument against wage taxes and minimum wage hikes (and even their existence in the first place). Mind you, I’m saying this as someone with a hardcore left-leaning macroeconomic worldview. But ‘facts is facts’

53

The OP of an Elections thread points to a YouTube interview of Andrew Yang. I’ve not watched the whole long interview, but please do watch the first 15 minutes or so. Mr. Yang emphasizes an important point that is becoming very clear:

In the developed world, human labor “deserves” an ever-diminishing “share of the pie” because it is increasingly replaced by software or robots (or out-sourced). Truck drivers are in demand, but don’t see pay hikes as land-owners, capitalists, and highly-skilled specialist workers get increasing shares of the pie. Soon, even truck drivers will come under downward wage pressure as automated cars and trucks appear.

This is a huge change in human economic conditions, will continue to grow, and will be a very major political challenge for our children.

54

It’s not just that capitalists get bigger shares of the pie, although that is certainly an issue. But another issue is that for the labor can’t cut into profits; moreover, businesses are competing with other businesses. Company A and company B might need truck drivers badly, and one might be willing to pay 5-10 percent more than the other, but probably not 50 percent more. Therefore, the demand is for automation.

Yang is right about the fact that automation, not immigration, is the factor to pay attention to. The idea that immigrants are coming in and taking jobs away is largely unsubstantiated malarkey. Illegal immigrants aren’t doing nearly as much damage to labor as automation. Consider, too, that productivity is at or near all-time highs, which likely means that those who are still employed are productive but perhaps overworked.

55

UIAM, the way “productivity” is calculated is misleading. Isn’t it basically GDP divided by number of workers? That would be a valid calculation if 100% of product is due to human labor, but in fact that share is decreasing. More and more of the pie is “earned” by robots, computer code, intellectual property owners, rent seekers, etc.

56

I agree that automation is the driver of the loss of a lot of positions. But I don’t think anyone is really advocating that companies go back to the model of rooms of low wage workers keying in data from sheets of paper, as opposed to having the people who would fill out the sheets of paper directly fill it out on a tablet form.

57

One of the things that evolutionary search space heuristics uses is the ability to shift to a different position in the solution space - as well as traditional hill climbing.
Automated trucks are one such shift, though no trucking company is going to bet on their availability in the near future.
Now, if you stick to one area of the solution space, I can see how a pay increase could lead to reduce profitability. But what level of pay increase would cause more people to go to trucking school? What increase could stabilize pay demands while reducing the lost opportunities from not having enough drivers?
Sure, no single company would risk it.
I’m sure you are aware of many industry leaders who should have changed their strategies and didn’t.

58

That isn’t what anyone is suggesting.
What we’ve seen in similar threads (not so much in this one) are people who are convinced that since the last five stages of automation increased jobs, so will this one.
What we’ve seen this time is not a reduction in jobs but a reduction in “good” jobs and an increase in lower paying jobs. Plus the productivity increases are increasingly going to owners, not workers. So the question is whether to accept this situation, which is likely to get worse, or do something about it. Which is going to have to be far more radical than minimum wage increases.

59

Yes. Absolutely.

All of this is why I was talking about an approximate “local” maximum. If there’s a MAJOR shift available in optimum strategy, existing industry is significantly less likely to find it. That’s why it’s so often such a bloodbath when someone finally reasons/stumbles their way into the highly improved way of doing things.

60

I don’t posit that this Guardian article is scholarly evidence per se, but it touches upon the issue that we’ve addressed here, which is that while automation might create opportunities within a market and while it might not drive human labor into extinction, there could be, there seems to be now, a challenge in replacing high paying jobs that are lost to automation with new jobs that pay just as well.

This, too.

Minimum wage increases might actually exacerbate the problem, in fact, particularly if they come at the impetus of political fiat and aren’t based on economic reality.

There’s also the creeping strain of our debt burden, which never went away. We have a nexus of fewer and fewer good jobs for young people with more debt and fewer economic ladders to climb.