Productivity gains lead to higher wages.
That's been an economic mantra forever, or least since Henry Ford doubled wages to $5 a day. Ford's dramatic pay hike and the moving assembly line helped turn out Model Ts and boosted the idea of an American middle class. People that could buy more cars.
Economists call that a virtuous circle. It's not happening anymore. Productivity is rising, but middle class wages are stagnating.
Plastics economist Bill Wood said the year 2000 marked the peak median household income. It was an “inflection point” where the computer revolution, automation and other productivity-enhancing tools generated great wealth. It's been downhill since then.
“It became so obvious, that we were going to just start making stuff with technology, not with labor input,” he said.
A strong economy masked that reality. But the tepid recovery from the Great Recession now has exposed the wage-productivity gap, as well as the skilled-worker shortage for manufacturing. Both topics finally are making news.
“For a long time, it was kind-of a simple, straightforward conversion, that if you wanted to produce more of anything, you had to add more labor,” Wood said. “If you wanted to get more out of the end of the factory, or the farm, you had to put in more human input, more employees, more labor.”
Wages are lagging productivity, and even though that fact is under the radar screen of the average person, you can bet it's a major cause of that vague unease that something isn't quite right in America. Mark Sankovitch, president of Engel Machinery Inc. said predictions of 2.5 or 3 percent GDP growth sound pretty good, in an economy still recovering from recession.
“But it's not. In historical terms, it's way too low,” he said.
Past recoveries have seen GDP growth of 4, 5 or even 6 percent, he said. We've lowered the bar, and our collective expectations.
“So with your productivity gains, I don't think you get the benefit of the increased wage, because you don't have enough GDP there to support it,” Sankovitch said.
There are jobs, and higher pay, for the right people. Engel in York, Pa. — and every other machinery manufacturer — needs service technicians.
“We want to hire, but when we go back to this middle class America, which hopefully would have a pool of them, they're not there. And it makes it extremely, extremely difficult,” Sankovitch said.
Plastic Components Inc., a custom injection molder in Germantown, Wis., is highly automated and doesn't have many plant-floor operators. PCI even opened a second operation that runs lights-out, as machines mold parts and filled-up boxes move along a conveyor. No employees there.
PCI's human resources manager, Wendi Jay, said the company typically hires just two or three new employees a year. Operators are easy to find.
“Most recently, we've been hiring skilled engineers. Right out of Ferris State [University] is where they're coming from,” she said.
These skilled, productive people are in demand. Jay said PCI is paying about $6,000 a year more for a starting engineer now than just two years ago.
“We're looking for very skilled individuals that can do automation,” she said. And the company sends engineers out on sales calls, so they're not just staring at a computer all day. “They have to have a wide range of skills.”
So what's the solution? After all, “robots don't buy cars,” said my father, a Cleveland autoworker. That was in the early 1980s as General Motors installed welding robots.
It's a tough challenge.
A columnist in the Feb. 19 Wall Street Journal bemoaned the gap between productivity and pay. He cited a report showing the factors included globalization, technological changes and a growing financial sector that is gobbling up more of the economy. Corporate profits are strong. His solution: link tax rates a company pays to their compensation strategies, encouraging them to share productivity gains with workers.
Predictably, letters to the editor blasted that idea. It does seem simplistic. Two writers cited the incredible gains of farming.
Bill Wood said in the past, “if you had a farm and you wanted to produce more crops, you had to have more kids. Every person that was born represented economic productivity.” Two hundred years ago, it required 90 percent of the population to feed 100 percent of the American population. Now 2 percent feeds us and much of the rest of the world.
In plastics factories, one new machine replaces two, using less energy, taking up less floor space and producing more and higher-quality parts.
Everyone with kids has wondered what jobs will be there in 10 or 20 years. Here's another truism we've all heard since high school: A strong middle class is the key to a stable America. Like it's a birthright.
Wood, who runs Mountaintop Economics and Research in Greenfield, Mass. (and who also will start a regular column in Plastics News starting next week), gives some interesting historical perspective on the idea of a “middle class.” The big problem, he said, is that anytime you hear about the middle class, it's a politically based solution. But at the core it's an economic issue.
“The middle class as we know it, is primarily a market-based group. Our founding fathers defined a middle class — they didn't call it that, but they said that each household and landowner is unto himself. Self-governing,” Wood said. “From a governance perspective, they created the Constitution to set us up to be politically middle class — in other words, we weren't going to be aristocrats and kings based on how you were born and that's just who you were. And you didn't have to be a serf if you were born into a bloodline that wasn't the ruling class.”
Basically, you were in charge of yourself. This was America, not England, not Europe. It was also the late 1700s.
“They didn't really understand what that was going to mean in terms of a dynamic economic power and engine it turned out to be,” he said. “Because of fate, because of luck, because of a lot of things. It propelled us to become the biggest, strongest, most powerful economy. Not a political entity. [The founding fathers] thought we'd still be farmers. And we just took over the world. We just kicked ass. We just started doing things nobody'd ever heard of before. Going to the moon. And everybody has a car. You kidding me? Everybody has a car? And everybody has their own house, and everybody has appliances. And everybody has everything.”
Wood says that the writers of the Constitution planted a seed “that grew up into this unbelievable thing. It was kind-of like an accident. And we almost blew it up in the Great Depression. But we survived it, and that strengthened the middle class. And then Hitler tried to take us over, but we beat him back and the all the effort that went into winning the war, that came back and just made the middle class.”
Rosie the Riveter. Booming factories. Union labor.
Now it's not working. It's time for a reboot, a reset on the “middle class.”
Economics and politics are important. But when you consider history, enigma clouds the debate. Fate is a mysterious thing.
“It was almost by accident,” Wood said. “Like, how would you plan the Depression, and war, that would make us strong? So you can't really tell how to redo it now, because nobody knows how it got done the first time.”
Bregar is a Plastics News senior reporter.