Why isn't the "Economic Recovery" increasing workers' pay?

[coloradoatheist]

Allocating the cost via the employee is bad accounting. The cost must ultimately flow through to the product, but it's not useful to allocate it per employee; far better to simply allocate it to the product range directly.

Having run an Activity Based Costing project for a manufacturing plant, in association with our site accountant, I can assure you that misallocating cost via headcount would be a mistake in almost all situations.

If your business is solely labor then you would allocate it that way. But in the case of manufacturing you still roll up the overhead of the employees cost and then allocate that combined cost into a mixture you feel best represents how those costs going into your finished products. The overhead costs of your accountant, office space, phone, computer, internet, travel are put as the accountants costs, though they are in different budgets and then total cost needs to be allocated to Product A in some fashion so that you know that product A needs an accountant to support it.

 

[Loren Pechtel]

Doctors are pulled in many directions but they have standards of care and they work to make diagnoses despite interference from insurance companies.

I'm just saying that the box-checking seems to be much worse when dealing with the government.

There is the other inefficiency you somehow don't see.

The people that waste the time of specialists with things that could be handled by a PCP.

It is a balancing act. Many people do know when they need to see a specialist but many don't have a clue.

You missed my point--in general I agree with the gatekeeper system. I'm just objecting in the case where there's an ongoing need to see a specialist. At least our insurance company got more sensible about it--now the authorizations are good for a year rather than the 90 days. (With the 90 day rule my wife ended up seeing her PCP solely for the purpose of getting an authorization for a post-surgical followup appointment.)

3) The HMO system hides most of the paperwork from the consumer (to some extent I actually think this is bad for the system--when I look at the medical summary for my wife it is missing most things because they are in-house) but it doesn't get rid of it, it's going on behind the scenes and still focused on look for a reason to deny rather than try to find the right answer.

What this is supposed to be criticizing about Medicare I don't know. But Medicare is not the HMO system. The HMO system is part of the problem. The for-profit system is a huge problem.

Medicare has been encouraging patients to go to the Medicare Advantage plans--which are all HMOs.

4) Even in a salary system people are incentivized to provide more treatment than needed--they have to have enough patients to justify their jobs.

Few get more treatment than needed.

Sometimes more tests and procedures are done than are needed to cover physicians from law suits.

You apparently don't understand--the specialists want to protect the demand for the jobs and don't want to say "there's no need for you to see me anymore".

 

[SimpleDon]

And without office space where are the workers going to work? On the street? Maybe you can get lucky with a business that doesn't need office space. This is crazy, you definitely need to understand your costs for the space you are using per employee. If you didn't, there would be no difference in an office space costing $100K or $50K a month.

There would be 50K per month difference. Duh. Your responses are evading the issue. If an office of 20 loses an employee, then according to you, the cost per employee just rose. Arithmetically that is true, but it is a meaningless number for decision-making.

This discussion of the marginal costs of an employee is under the heading of "Management Accounting." It is critical that an organization has a system of accounting to aid management, that it is consistent over time and it is even more critical that the managers understand the limitations of the accounting as a tool.

Our management at one time assigned all of the overhead costs of the office to the engineering done by our directly hired engineers and designers. They arrived at a cost of say $125 an hour for our direct engineers and designers to do the work. At the time, the early 1980's, it cost an average of $80 an hour to hire contract or consulting engineers to do the work, plus we didn't have to pay these people when we didn't have any major projects to do. The solution was therefore obvious to them, instead of hiring engineers and designers directly we should hire the only contract or outside consulting engineers, keeping only a small core group of engineers to supervise the outside groups.

What happened, as you well know, is that when they recalculated the costs of this core group their costs had surged to well over $200 an hour! Because they divided the same overhead costs among fewer engineers, the cost had to go up.

The error was that the overhead costs have to be paid for out of the incoming revenue stream no matter how the division of the engineering is done between inside and outside employees. That the contract and outside engineering costs have to be burdened with at least some of the overhead costs too. Unfortunately the managers that made this decision kept it a secret because it involved a change in employment for a large number of people and it wasn't exposed where the simple faulty reasoning behind it could have been pointed out.

Another example, it still is common in the pharmaceutical industry in the US to assign most of the overhead costs to the research area and not to manufacturing and distribution. As a result, the research in new drugs is now being offshored to Europe and Japan because research in the US is now too expensive. Why? Because the companies consider their now huge marketing costs to be overhead costs.

It is the same error that my company made in the 1980's. It took us years to recover from our simple mistake. The drug companies have yet to realize their mistake, and it is costing our country a lot of lost intellectual knowledge as well as these high paying jobs.

 

[coloradoatheist]

And without office space where are the workers going to work? On the street? Maybe you can get lucky with a business that doesn't need office space. This is crazy, you definitely need to understand your costs for the space you are using per employee. If you didn't, there would be no difference in an office space costing $100K or $50K a month.

There would be 50K per month difference. Duh. Your responses are evading the issue. If an office of 20 loses an employee, then according to you, the cost per employee just rose. Arithmetically that is true, but it is a meaningless number for decision-making.

This discussion of the marginal costs of an employee is under the heading of "Management Accounting." It is critical that an organization has a system of accounting to aid management, that it is consistent over time and it is even more critical that the managers understand the limitations of the accounting as a tool.

Our management at one time assigned all of the overhead costs of the office to the engineering done by our directly hired engineers and designers. They arrived at a cost of say $125 an hour for our direct engineers and designers to do the work. At the time, the early 1980's, it cost an average of $80 an hour to hire contract or consulting engineers to do the work, plus we didn't have to pay these people when we didn't have any major projects to do. The solution was therefore obvious to them, instead of hiring engineers and designers directly we should hire the only contract or outside consulting engineers, keeping only a small core group of engineers to supervise the outside groups.

What happened, as you well know, is that when they recalculated the costs of this core group their costs had surged to well over $200 an hour! Because they divided the same overhead costs among fewer engineers, the cost had to go up.

The error was that the overhead costs have to be paid for out of the incoming revenue stream no matter how the division of the engineering is done between inside and outside employees. That the contract and outside engineering costs have to be burdened with at least some of the overhead costs too. Unfortunately the managers that made this decision kept it a secret because it involved a change in employment for a large number of people and it wasn't exposed where the simple faulty reasoning behind it could have been pointed out.

Another example, it still is common in the pharmaceutical industry in the US to assign most of the overhead costs to the research area and not to manufacturing and distribution. As a result, the research in new drugs is now being offshored to Europe and Japan because research in the US is now too expensive. Why? Because the companies consider their now huge marketing costs to be overhead costs.

It is the same error that my company made in the 1980's. It took us years to recover from our simple mistake. The drug companies have yet to realize their mistake, and it is costing our country a lot of lost intellectual knowledge as well as these high paying jobs.

I agree with you SD that a business needs to make sure they allocate the costs correctly. But the argument here has been that an employee has no overhead costs. The business shouldn't allocate the cost of an employees space to the employee, or the cost of IT, or travel costs, or training costs, but that the only cost of an employee is what you pay them.

 

[SimpleDon]

We are discussing economics here. It is not unreasonable to inject some economic theory.

Increasingly economists in the US and Canada are embracing an economic theory developed by the institutionalist school of economics, the  dual labour market hypothesis. The hypothesis is that there are two distinct labor markets in a modern, developed economy. The first is a core labor market that ...

... corresponds to the core economy, where wages and productivity are relatively high, as are the requirements and the costs of labor training, as well as the costs of monitoring of the work. Within this economy, there is a well-structured wage or salary scale, where experience and seniority are given prominence, and there can be a high degree of unionization. Also, each organization within the core economy tries to develop a sense of affiliation among its staff and workers. The other labour market is the peripheral one, where little training is required, where the monitoring of work is inexpensive, and where wages are systematically low. In the organizations of the peripheral economy, the turnover of employees is often encouraged.

Marc Lavoie, Post-Keynesian Foundations, New Foundations, 2011, Edward Elgar Publishing, pages 293-294

This is an example of a heterodoxical economic theory making inroads into mainstream orthodoxy. The reason is obvious, the dual labor market hypothesis is a better description of the reality of our modern economy than the theory it is displacing.

Neoclassical, mainstream, neoliberal, Austrian/Libertarian, classical economics all view the labor market as a single, unified market like the market for apples, where the workers offer their labor and employers competitively bid wages and benefits to attract their needed workforce. As is the case with apples, the lower the price the more consumers can buy. Wages are the price of labor so the lower the wages the more workers will be hired. Conversely, the higher wages are the fewer workers will be hired. The reason for differences in wages is because of differences in human capital; schooling, experience, skills, temperament and tastes, in other words, all of the differences in wages are due to the characteristics of the supply side, of the workers.

In the dual labor market theory, the demand side characteristics of the employers are as important or more important than the supply side characteristics of the employees in explaining the differences in compensation. The demand side characteristics are things like norms in retaining workers, wage scales in the company, promotion norms, etc. Even the attitude toward how much revenue is paid in dividends to the shareholders and how much goes toward increased wages. How paternalistic the company is to their employees. How much a single company dominates their labor market. How willing the company is to relocate new hires.

This dual labor market hypothesis is just one example of a more generalized tool of economics,  labor market segmentation, which further divides the labor market by geographic location, by industry, by local education availability, even by race and gender, etc.

The natural conclusion of this constant subdividing of the labor market has to be the point that the post-Keynesians reached a long time ago, that the labor market doesn't exist in any meaningful way,

• that it doesn't resemble a market, that wages are not set by the supply and demand for labor but by norms in hiring, promotion, seniority, and retention,
• that wages are vastly more important to the economy than just being the price of labor and a cost of production because they fund the effective demand that now drives the economy,
• that market forces can't drive down the wages for existing employees because employees react badly to having their wages lowered to do the same work,
• that labor is not a commodity, it can't be stored or separated from its supplier,
• that labor not used is lost forever,
• that labor productivity generally improves with use and depreciate with idleness.
• that the productivity of labor depends on the health and motivation of the workers,
• that wages are set by the relative negotiating power of the employees and the employer and that the employees' negotiating power is less ...
  • because the employee usually can't bear the costs of relocating to a better job opportunity,
  • because so much work now requires specialization that a worker becomes bound to one industry and one employer in most areas.
  • because the employee can only increase their negotiating power by collective action rather than as an individual,
  • because having a job is much more important to the employee than having an employee is to the employer.

In economic terms, the demand for and the supply of labor are not well behaved, regular functions. That opposed to other markets the labor market is controlled largely by normative forces like customs and concern for equity rather than the non-normative (anomic?) forces that prevail in a commodity market.

This doesn't even list the pressures applied by the government to tip the scale toward the employer in this the age of neoliberalism. The emphasis on preventing inflation instead of pursuing full employment. The eroding of support for organized labor. The championing of right to work laws. The bogus legal requirement that the sole purpose of a corporation is to make money for its shareholders. The support for globalization, for free trade, for capital and intellectual property flight. The lack of prosecution of corporations and individuals illegally off-shoring profits and income. The establishment of banks too big to fail and of bankers too important to jail. The tax breaks for relocating production facilities to low wages areas. The idea that a corporation is a person making decisions independently of the real people in the management. The obstinate support for the 40 hour work week and opposition to increasing holidays, to maternity leave, to increasing the minimum wage, to employer-funded health care, to defined benefit pensions, and many others.