Flummoxed, Frustrated, but not Fooled
The top 500 companies in America grew their profits last year by 31.7%. Meanwhile, they added only .7% to their workforce. Wal-Mart, the nation’s revenue leader kept their headcount level. Why all of this record growth with little or no addition to the workforce?
Earlier this year the Supreme Court heard oral arguments in the Hobby Lobby vs. Sebelius case. Hobby Lobby is faced with what some would call a moral dilemma. Hobby Lobby wishes to provide healthcare for their workforce of over 22,000. But they don’t choose to offer coverage for aborticant drugs. Their choice is to either drop healthcare coverage and pay a fine of $20 million per year for not offering healthcare, or offer healthcare without coverage for aborticants and pay a fine of $470 million per year for offering a non-compliant plan. Hobby Lobby has chosen to claim the moral high ground and provide a healthcare plan but not offer aborticants. The affordable healthcare act requires plans to include aborticants. The Supreme Court will decide if Hobby Lobby must pay $470 million in fines for doing the right thing. Because the Supreme Court relies more heavily on case law than the actual constitution, their decision will be foisted on the rest of us.
One of the tactics that large companies use to reduce the cost of healthcare coverage is to purchase plans with very high deductibles but offer to the employees the same plan with a lower deductible. In these cases the employer pays the difference between the plans true deductible and that realized by the employee. It’s known as a retention, and can be thought of as partially self-insuring. Doing so puts the company at risk of paying the gap, but reduces the cost of insurance to the employer and employees. The affordable healthcare act reduces the maximum amount for which a company can self-insure. The consequence is a higher premium for a company’s healthcare plan. In my case, the premium will increase by nearly $1000 per employee at Crader Distributing, or nearly $100K per year.
The minimum wage was first established in 1938 at .25 cents per hour. And much like labor unions in the early days, was a good and necessary action. Adjusted for inflation, .25 cents in 1938 is equal to $4.06 today. Today’s minimum wage is $7.25. Minimum wage reached it’s highest adjusted for inflation rate in 1968 at $1.60, which would be $10.68 today. That’s the first year that while working at a grocery store I earned the minimum wage. I had to wear a tie to rake in what I thought at the time was akin to hitting the jackpot. And now I know that in relative terms, I had. It certainly beat mowing lawns.
Today, some states and municipalities have a minimum wage higher than the federal minimum—California’s is $9. Seattle recently raised the city’s minimum wage to $15—the effect of that is yet to be seen. There’s much talk about significantly raising the federal minimum wage. Economists don’t agree on the effect on employment of an increase in minimum wage. Most do agree that advancing minimum wage too quickly would have a negative affect. Philosophical differences cloud the interpretation and presentation of economic forecasting models.
Only a third of the workforce is now subject to the minimum wage. But changes in minimum wage influence all hourly rates. And versions of proposal legislation would subject more categories of workers to minimum wage laws.
In my conversations with other owners of companies that employ large numbers of people the answer is usually the same. Nearly everyone plans to continue to offer healthcare benefits until the rules, regulations, and costs become prohibitive. Nobody I’ve spoken to has chosen to drop healthcare and pay the affordable care act fine, which is by far the least expensive option. Owners of successful companies realize that a company’s most valuable asset isn’t on the books—it’s the people. Take care of the people and they’ll take care of the company.
The decision to invest in machines vs. people begins with the mathematics. And in most cases, unless the mathematics heavily supports equipment, the decision is to throw more people at the project. Everyone I know would prefer to invest in people rather than machines. I don’t see that ever changing. But there’s a limit.
The bad news – most owners now see the cost of people skyrocketing and are now beginning to invest more heavily in equipment and adopting processes that will increase productivity with fewer people.
There’s more. What about the jobs that American companies are outsourcing to undeveloped countries? Glad you asked. There are basically two reasons a job gets sourced elsewhere—cost of labor and environmental. Both skilled and unskilled labor are now being sourced elsewhere. There’s a global economics conversation that could be had at this point, but the simple question to ask is this. Will the increased costs caused by the affordable care act care help or hurt the cost of labor comparison? And do the regulations imposed by EPA give American companies an advantage or disadvantage? And while you’re having a philosophical debate with yourself, toss into to the thought process the proposed increases to minimum wage.
The spirit and culture of a company is in the people. The most valuable asset of a company isn’t a machine or a piece of software—it’s the people. So long as a company is competitive it will be profitable. So long as it’s profitable it will employ people. The number of people a company employs depends on the cost of people vs. an alternative—a machine or outsourcing. Based on what is occurring in America today, is the cost of people, relative to inflation and the rest of the world, going up or down?
Big business does what’s best for big business. Revenues of America’s top 500 grew by 31.7% last year. Headcount was virtually flat. Can you now answer the question, why? And then ask yourself—are we taking the steps necessary to increase or decrease the rate of job growth? It’s normal to flummoxed, and frutrated. Don’t be fooled.