Third Rate Workers for a Third World Economy

By Ray Marshall
Published in The Social Contract
Volume 2, Number 1 (Fall 1991)
Issue theme: "Immigration and free trade with Mexico"

Increasing the supply of educated workers by reforming our schools and training programs is necessary to create a high-performance, high-wage economy. But that is not enough. Major changes in our industrial organization and national economic policies are also needed to create the demand for a highly-skilled work force.

The US is losing its status as a high-performance country because its industrial relations and economic policies have been slow to adjust to a more competitive world. Our failure to adapt implies economic decline, growing inequalities in wealth and income, and declining real wages - even though corporations based in the US may be able to maintain their profits, at least for a while, by continuing their traditional production systems and shifting employment to lower-paid workers overseas and in the US.

Unfortunately, many Americans accept these trends and see little need for the highly-skilled and highly-educated workers that would be required of a high-wage economy. In fact, since most American companies are not pursuing a high-wage strategy, they do not perceive a need for employees with better thinking skills.

The mass-production system of most US firms organizes work so that thinking, planning and decision-making is done by managerial, professional and technical elites. Line work is simplified so that it can be done be relatively unskilled workers. The assumption is that there is one best way to perform a task. It is management's responsibility to discover that one best method and impose it with detailed regulations, enforced by supervisors and inspectors. The assumption is that workers will loaf unless they are closely supervised. Therefore, management seeks to gain control of the work by standardizing work processes and transferring ideas, skills, and knowledge to managers and machines.

In today's more competitive world, dominated by knowledge-intensive technology, the key to economic success is quality, productivity and flexibility, not the economies-of-scale of traditional mass-production systems. Computerized technology makes it possible to gain competitive advantages through flexible manufacturing systems in which the same technology can be used to produce different products. Whereas the mass-production system's long production runs made it possible to amortize defects over those long runs, more customized, shorter production runs cannot afford many defects. There-fore, the workers must be capable of overriding the machines if the latter start producing defects.

The US is not going to be able to adapt to this new environment simply by increasing worker skills. Employers must be induced to reorganize the work force. Unfortunately, many US employers have become comfortable with the status quo, following a low-wage strategy - trying to compete against higher productivity abroad by paying lower wages at home. The low-wage strategy may work in the short run, but in the long run, it's a loser. In the long run, we are not going to win a wage-cutting contest with the Third World.

We now have public policies that encourage companies to pursue short-run, low-wage strategies. Like our increasingly successful European competi-tors, we must begin to reverse these policies and instead encourage work reorganization that empha-sizes quality and flexibility by taking advantage of higher work-force skills.

In Sweden, for example, a full employment strategy, which forced work-place reorganization, was the nation's most important policy. A tight labor market meant that workers didn't have to take unskilled jobs. Indeed, though Volvo managers admit their original reasons for creating Volvo's famous work system had nothing to do with gaining increased productivity, gains in productivity were nonetheless a dramatic result. Their work system, which eliminated the progressive assembly line and made workers responsible for quality control over the entire product, was initiated because Volvo simply could not get well-educated Swedish workers to take assembly-line jobs, since there were other work opportunities available.

The US took a small step in the right direction when we adopted plant-closing legislation last year, making it a little more difficult to lay off workers. Now, employers know their workers must be kept on the payroll for a while, so they have more incentive to invest in the growth of those workers' skills. If the economic incentives are to lay workers off in a downturn, companies generally won't hire and train more skilled workers, since those workers will take their new skills to a new job, benefitting a competitor.

Austin, Texas provides a good example of what tight labor markets and proper public policy can accomplish. In the 1980s, both Motorola and IBM were competing in the Austin labor market. Local IBM managers, constrained by a corporate policy that forbid the layoff of workers in a downturn, were forced to compete by upgrading workers' skills. Motorola, on the other hand, followed a traditional layoff strategy. However, they found that each time they had a layoff, their best workers filled openings at IBM. Needless to say, they were forced to reconsider their strategy. As a result, they got the state's unemployment compensation rules amended so that, in a downturn, companies could work a shorter work week and retain their work force. This kind of unemployment compensation reform is now an incentive for work-force upgrading even for those firms not in competition with IBM.

Many of our companies take the short-run view and don't invest in hiring and training better-paid, skilled workers. One of the key reasons for this is that we have such high real interest rates in this country. If we get real interest rates down, thereby removing the pressure for managers to save cash for regular debt repayment, it would be easier for companies to take a longer view. Additionally, we should reform corporate law to make it more difficult for managers to pay themselves big salaries based on short-run performance. Lowering tax rates on long-term, as opposed to short-term, capital gains would help. We also need to reform our pension laws in order to make it easier for pension funds to create new assets by investing in job-creating activities, rather than simply bidding up the prices of existing assets.

Further, we should have a national youth service that would provide job options but which would also require participants to prepare for a high-school equivalency diploma. Contrary to the views of most orthodox economists, I am convinced that having a much higher minimum wage would discourage em-ployers from hiring young people who belong in school, training programs or youth service programs.

Like a low minimum wage, our poor income-support system for women creates the wrong incentives for employers. Our European competitors don't require women to take a low-wage job just to qualify for health care for their children. Due to their more favorable paid family-leave policies, European women can have time off, which tends to tighten the labor market and raise wages for everybody.

Orthodox economists also fail to understand that making it easier for workers to organize unions and bargain collectively is necessary to support high-performance enterprises. On one hand, improved job security for workers encourages managers to invest in their skills. On the other, workers are willing to go all out only if they feel their increased productivity will not make some of them superfluous. It is very difficult to have effective, cooperative arrangements between parties with greatly unequal power. Unions should be strengthened to challenge elitist management prerequisites and unfair compen-sation systems that not only create disunity but also have little to do with company performance. Stronger unions are likely to challenge management practices that maintain short-run profits to the detriment of workers' interests. Our competitor nations, for example, promote high-performance management practices through regulations that require consultation with workers' representatives or justification to public bodies before plants can be closed, wages cut, or workers laid off.

Giving worker representatives joint control of company pension funds would also help. Workers are much more likely to take a long view than corporate stock holders, since jobs are not nearly as mobile as investment capital.

Finally, our trade policies do not discourage American employers from following a low-skill, low-wage strategy. We should imbed labor standards in all our trade rules, requiring nations that export to us to respect the freedom to organize and bargain collectively, to maintain a safe and healthful work place, to prohibit forced labor and the exploitation of children. These labor standards would put a floor under international wage competition and help US managers to manage better rather than trying to compete by reducing labor standards. We have inserted these standards in every US trade bill passed in the 1980s, but to be effective, we need to make them a part of the GATT system.

About the author

Ray Marshall, Secretary of Labor from 1977 to 1981, teaches labor economics at the University

of Texas, Austin. In this adaptation of an interview, he argues that the US must increase its

supply of educated workers and its demand for a highly-skilled workforce.

Copyright 2007 The Social Contract Press, 445 E Mitchell Street, Petoskey, MI 49770; ISSN 1055-145X
(Article copyrights extend to the first date the article was published in The Social Contract)