Circuit City layoffs

From Today’s New York Times.  Hits a little close to home on several levels.

 

April 4, 2007

Economix

One Safety Net Is Disappearing. What Will Follow?

By DAVID LEONHARDT

Over the years, American companies have built a pretty extensive social safety net for their workers. The clearest examples of it are pensions and health insurance, which sprang up during the wage freeze of World War II, when employers were looking for creative ways to give raises. Today, the United States is the only major country in the world where the private sector plays such a big role in caring for the old and the sick.

But the corporate version of the welfare state is not just about retirement and health care. Another, much less obvious, piece of it is the steadily increasing pay that most workers receive over the course of their careers. All else equal, a typical worker in his early 60s makes about 50 percent more than a worker in his early 30s.

This arrangement produces some enormous benefits for society. It allows Americans to enjoy ever-rising living standards over their lives and helps them pay some big expenses, like their children’s college tuition and their parents’ elder care, that start to hit in middle age.

In strictly economic terms, however, paying people based on their age is a bit skewed. Sixty-year-olds are indeed more productive than 30-year-olds, studies have shown, but not 50 percent more productive. In effect, most companies are underpaying their younger workers and overpaying their older workers. Experience isn’t quite as valuable as we might like to believe.

This somewhat uncomfortable fact was a big part of the extraordinary layoff announcement from Circuit City Stores last week. On Wednesday, the company fired 3,400 people, or about 8 percent of its work force, not because they were doing a bad job and not because the company was eliminating their positions. Instead, Circuit City executives said the workers were being paid too much and that the company would replace them with new employees who would earn less. It was an unusually clear window on the ruthlessness of corporate efficiency.

Whatever you think of the urge behind that efficiency — whether you see it as the wellspring of American competitiveness or the source of middle-class insecurity — it’s clearly causing the dismantling of the private-sector safety net that has served the country well over the last half century. What, then, is going to replace that safety net?

The laid-off Circuit City employees worked in the company’s stores and warehouses, selling electronics, unloading boxes and the like. They generally earned $10 to $20 an hour, making them typical of the broad middle of the American work force. Nationwide, the median hourly wage of all workers is about $15.

“We just bought our first house about two or three months ago, and I’m afraid I’m going to lose it,” Alan Hartley, a car-stereo installer in the Charlotte, N.C., area told the local NBC affiliate after he’d been fired. “I’m not sure what I’m going to do. I’m hurt mainly because I love this company. I planned on retiring from it. I feel I’ve taken very good care of them, and I can’t believe they did this.”

Like a lot of companies, Circuit City sets “pay ranges” for its various jobs. Once associates reach the top of the range, they are not supposed to get further raises — beyond the basic cost-of-living increases that also push up the pay range — unless they are promoted.

But Circuit City’s store managers found it hard to stick to the policy. When they were divvying up the yearly pool of raise money, they would often increase the pay of all workers who had done a good job, even those at the range’s ceiling, said Bill Cimino, Circuit City’s chief spokesman. It just seemed like the decent thing to do.

“It’s hard to say no,” Mr. Cimino told me. “It’s only 3 or 4 percent.”

Eventually, though, the company’s executives decided they couldn’t afford decency for decency’s sake. In recent months, there has been a price war over flat-panel televisions that’s an excellent case study of the benefits and drawbacks of globalization. The price cuts have made the televisions, which are manufactured in Asia and Mexico, affordable to many more families, but have also squeezed Circuit City’s margins.

At the same time, the company has to reckon with cut-throat competition from Wal-Mart and Best Buy. Wal-Mart, in fact, has also been taking steps that seem aimed at pushing out more experienced workers, like setting wage caps for certain jobs and requiring people to work nights and weekends. In 2005, a top executive wrote a memo to Wal-Mart’s board, which McKinsey & Company helped put together, noting that “the cost of an associate with 7 years of tenure is almost 55 percent more than the cost of an associate with 1 year of tenure, yet there is no difference in his or her productivity.”

There is a real question about whether these chains will hurt themselves in the long run by damaging employee morale, customer service and, ultimately, productivity. (Circuit City did not give the fired workers the chance to keep their jobs at lower pay. I’m guessing that executives were afraid that workers whose pay had been cut wouldn’t make effective sales associates.)

But there’s no question that corporate America is moving in the same direction as Circuit City. Companies are wringing out what they see as inefficiencies, like traditional pensions and health insurance coverage, and tying workers’ pay more closely to their performance.

It’s probably not possible to halt these changes. It may not even be desirable. The flexibility of the American labor force seems to be one reason that recessions have become less frequent and unemployment is less of a problem here than in Europe, notes Jason Furman, a leading Democratic economist. In this country, fast-growing companies can hire new workers without worrying that they are making a 30-year commitment.

But it would also be foolish to pretend nothing is changing. The corporate safety net of the 20th century is going away, and a fundamentally different private sector will require a fundamentally different public sector.

If companies aren’t going to provide health insurance, the government will need to. It can do so directly, through a single-payer system similar to those in other countries, or indirectly, by pooling together the uninsured and helping them buy coverage, as Massachusetts is now planning. If companies aren’t going to provide pensions, the government will have to provide better incentives to save, helping people overcome their natural instinct to choose a flat-panel TV today over an adequate retirement tomorrow. And if companies aren’t automatically going to give workers raises over the course of their lives, the country will probably need a new strategy for giving older workers new skills, something considerably more ambitious than the current, meager retraining programs.

This is the real message of the Circuit City layoff, and it’s likely to be the great economic debate of the coming decade.