Here’s your Big Jobs Idea

Hey, here’s your Big Jobs Idea: It looks as if the UAW is about to agree to new contracts based on flexible pay–e.g. no raises, but bonuses linked to something like profits.  Why is this signifcant? Because if the entire economy were filled with workers whose pay was flexible, there would be a lot more jobs. At least that is the argument of economist Martin Weitzman in his 1984 book The Share Economy.

Weitzman isn’t after some gooey labor-management cooperation. He is dealing in hard mathematical incentives. If workers make only their base pay plus a share of profits, for example, employers have an incentive to hire people as long as they are worth the base pay.  Meanwhile, the deal can be structured so every new hire slightly dilutes the “share” of all the previous hires. Where before you were splitting the profit “pot” by 100 workers, say, now each worker gets 1/101th.  That’s not gooey–it’s even a little nasty. But the upshot is that employers have an incentive to scoop up workers like “vacuum cleaners” in good times and to avoid layoffs in bad times. (And they would still have to pay enough to make workers want to work for them.)

Why isn’t this the big new jobs idea that Obama’s team is supposedly looking for? I’m not alone in having this thought! 1) The “share” strategy is focused totally on increasing employment; 2) It doesn’t involve big new spending–maybe a relatively small (in deficit terms) tax break to encourage firms to set up “share” payment systems. In fact, Weitzman specifically pitches his proposal as an alternative to Keynesian deficit spending. He notes that Keynes confronted the dilemma that in a recession wages are typically “sticky” downwards–but a “share” system solves that problem, since wages fall instantly with profits or sales or whatever the “bonus” is pegged to; 3) Labor unions–or at least the UAW–are already doing it. Obama could flatter them by saying he was following their lead. That’s a historic opportunity, since entrenched unions defending high-paid workers are traditionally the biggest obstacle to “share” schemes.

It probably doesn’t help the proposal to note that it’s almost a perfect Third Way idea, a policy that avoids Dem dogma (more spending) and Republican dogma (cut the government). It certainly seems preferable to the dreary collection of tax credits, spending and mortgage relief the administration is rumored to be planning. It might even pass. Are Republicans really going to oppose a tax incentive encouraging private sector job growth by giving employers more flexibility? …

Even if it’s total BS–which I doubt it is–it will solve Obama’s political problem (the need to say something fresh).

Gene Sperling? Bruce Reed? Maybe give Prof. Weitzman a call?…

  • Ike Brannon

    Actually, we could restructure unemployment compensation to encourage this. California experimented with this in the 70s or 80s and they saw fewer layoffs and a greater reduction in hours. The Bush administration tossed out their own unemployment insurance reform (re-employment accounts) but there’s never a good time to change UI.

  • http://www.facebook.com/people/Jeff-Vanke/100000552129448 Jeff Vanke

    This could be done for government employees, too.  One of the reasons their compensation packages are now so high, even in right-to-work states, is because when times were good and employment was tight, high compensation was required to get and hold good workers in the public sector.  How about they split their compensation into two like this, with a base pay + bonuses scaled inversely to unemployment?

  • Jsqfunk

    A lot of bad job markets are the fault of garbage local governments. How about O get together 100 successful small business types and they come up with the top 20 things local governments do to stifle business and the President uses his bully pulpit to highlight these items and maybe hand out some fed $ to cities that clean up their act… like a  “race to the top” but for small businesses.

    How about a shout-out at the next state of the union to the mid-sized city that is easiest to open a business?

    • Gloating Rich Guy

      Those are all in conservative states, that’s why.

  • Anonymous

    There would be bookkeeping issues. Do we really want accounting policies that affect profits (depreciable lives, etc.) to be matters of union negotiations? What happens when operating profits in the US are offset by currency fluctuations in Europe and Asia? Or vice verse? What if the company has to take a big write-off for some reason – do you adjust for that? Also: should the bonus be related to the whole company’s profits, or to those of the particular worker’s unit? If the former, workers in strong areas are dragged down by those in loss areas. If the latter, we could wind up with motion picture percentage-of-the-net accounting whereby the whole company is highly profitable but no individual unit seems to make any money. Still, this could work for some companies. It is unclear why the government needs to get involved.

  • http://www.peoplesrepublicof.com DWAnderson

    Why does this require government involvement?

    • Anonymous

      I think that the idea is that most businesses and their cultures are resistant to change and especially “unknowns” in issues as important as employees and profits. So, the government would come in to incentivize the businesses to try this approach.

  • http://steamcatapult.com/ Dave Pinsen

    This sounds interesting, but I’m skeptical for a couple of reasons. The first is that the presumption behind this proposal is that our labor market lacks flexibility. On the contrary, it’s a lot more flexible than the labor market in, say, Germany, which recently posted its lowest unemployment rate since reunification 20 years ago. As I noted elsewhere earlier this summer (“Germany Continues to Outpace The US in Job Creation”), it was German labor market policies limiting layoffs during the downturn (i.e., a form of labor market inflexibility) that appear to have helped German manufacturing employment bounce back faster than manufacturing employment here.

    The second reason I’m skeptical is that I doubt fears of wage inflexibility/pressure for raises are keeping employers from hiring in the US. Do you think that’s really a concern for, say, an auto company considering opening a factory in a low-wage, right to work state such as South Carolina? I highly doubt it. I think most policy makers and pundits don’t fully appreciate the disincentives to hiring American workers — and the incentives to hiring workers overseas — and until they do, they won’t be able to fashion powerful enough incentives to increase hiring here.

    • http://twitter.com/kausmickey Mickey Kaus

      If now US employers are free to lay workers off, why wouldn’t it *help* to give them an economic incentive not to do that? Likewise there may be many disincentives to hiring American workers. But if management is only on the hook for a relatively low base pay plus a fixed profit-share pool you’d think that would only help things. Seems more promising than a few more infrastructure projects or “green jobs.”

      • http://steamcatapult.com/ Dave Pinsen

        Sure, it would help to give companies an incentive to not lay off workers. But I’m not sure the Weitzman approach would be such an effective incentive, because in many cases, the salaries companies are offering are already pretty low. The Weitzman approach seems like it would be more effective in maintaining the UAW’s share of auto industry jobs than in increasing total jobs in the industry. Auto companies can already get workers at lower salaries in right-to-work states.

        Also, companies wouldn’t be just on the hook for low base pay: every employee is a walking potential liability. If the administration wants to increase employment, that might be something to tackle. Instead of having all of the EEOC lawyers going after companies, for example, why not designate half to defend employers against government charges at no cost? Why not do the same with OSHA, etc.?

        I agree that infrastructure projects or “green jobs’ aren’t promising, given how elements of Obama’s stimulus that were focused on them have been a bust. But let’s break the unemployment problem in half and consider how to solve it.

        1st half: limiting layoffs. For this, why not look at what has actually worked elsewhere, such as the policies Germany has to limit layoffs during downturns?

        2nd half: increasing employment. For this, why enact trade and immigration policies conducive to increasing employment of Americans, and provide a real incentive for companies to train the long-term unemployed? On trade, consider former Intel chief Andy Grove’s idea:

        Levy an extra tax on the product of offshored labor. (If the result is a
        trade war, treat it like other wars—fight to win.) Keep that money
        separate. Deposit it in the coffers of what we might call the Scaling
        Bank of the U.S. and make these sums available to companies that will
        scale their American operations. Such a system would be a daily reminder
        that while pursuing our company goals, all of us in business have a
        responsibility to maintain the industrial base on which we depend and
        the society whose adaptability—and stability—we may have taken for

        On immigration, for starters, we could simply enforce our existing laws. That would lead to a lot of illegal immigrant workers leaving, opening up jobs Americans could take. We could also limit legal immigration (with exceptions for physicians, talented and funded entrepreneurs intending to create jobs here, and truly world class individuals from other fields), to encourage American companies to hire more at home. If skills are really the reason why those companies aren’t hiring Americans, here’s an idea: Pay the companies to train the unemployed.

        For an incentive to hire the long-term unemployed, first, stop paying 99 weeks of unemployment benefits. The chances of someone finding another job after 6 months/24 weeks out of work are pretty slim, so 75 weeks of diminishing returns after that seems pointless. Instead: give the unemployed 24 weeks of unemployment, and then require them to work 40 hours per week for that money (grossed if their unemployment comp would work out to less than minimum wage otherwise). Let companies “hire” the unemployed for nothing. Zero. After a year, they can decide if they want to hire them for real. This should obviate some of the companies’ complaints about the skills of American workers, because they would be able to train them for a year, without paying them any salary.

        After a year, if a company decides not to hire someone, than give the person another 6 months of unemployment benefits, at a slightly reduced rate, then start the process over again.

  • Jsqfunk

    I have to come back to this post, this is such a half-baked idea…let me get this straight let’s say the President proposes this idea
    1. How long would it take for a significant number of companies to implement?
    2. From the time that a significant number of companies implement this idea, how long will it take to trickle down to the 9+ percent unemployment rate?
    3. How many people would be pissed off because their pay is going down?
    4. Do small and mid-sized privately owned companies want to share their net income with everyone down to the clerks and interns?

    How about this as a job starter
    1. The natural gas fracking people have to publish real time data relating to their wells, safety and the exact liquid mixture to bust up the rocks (i.e. the stuff people are worried about getting into their water supply)

    in exchange for
    1. 100% lifting of all federal restrictions to natural gas drilling (i assume there are some)
    2. Heavy pressure on states like NY to lift their bans


  • Jsqfunk

    How is this an innovative idea? sounds like wall street bonuses
    What does Obama or anyone in the govt have to do with implementing this idea? If a company starts paying a base plus bonus salary then what? It gets a tax credit?
    Come on Kaus!

  • Anonymous

    It’s certainly a step in the right direction… why do I think they’ll find someway to screw it up?

    Is this an admission by UAW that maybe people perform better when their compensation is tied to performance?  And if that’s true then where does that leave the teachers unions who generally reject any attempt to tie pay to performance?

    Also can we please do this with the public sector unions?  Obviously Government doesn’t generate profits, but cutting spending would be the equivalent.  If public sector union employees could make government more efficient then bonuses would not only be deserved but money well spent.