High Wages for Everybody

It is possible to raise wages, lower prices, and make more money

Published: Wednesday, February 26, 2020 - 13:03

Almost half of Americans work in low-wage jobs despite the nation’s low unemployment rate. Aimee Picchi, writing for CBS News, cites a Brookings study that says “44 percent of U.S. workers are employed in low-wage jobs that pay median annual wages of $18,000.”¹ A Bloomberg story adds, “An estimated 53 million Americans are earning low wages, according to the study. Their median wage is $10.22 an hour and their annual pay is $17,950.”²

These wage levels are not consistent with the United States’ industrial and technological development or its standard of living, but this is far from the only issue. Executives with profit-and-loss responsibility should realize that low wages are also often symptomatic of low profits. Purchasing managers should recognize that a supplier’s low wages are often symptomatic of excessively high prices, even though this seems counterintuitive. The reason is that low wages, low profits, and high prices all have the same root causes: waste (muda) and opportunity costs. Recognizing this simple fact, for which there are proven, off-the-shelf, and simple remedies, opens the door to almost limitless wealth for all stakeholders.

Economic implications

Another issue relates to national prosperity and the federal deficit, and it is called velocity of money. It means that an additional dollar in wages, if spent, can create several dollars in activity that drive economic growth. The Federal Reserve Bank of Saint Louis (FRED) reports that, for fourth quarter 2019, the velocity of the M1 money stock (i.e., highly liquid assets such as cash, money in checking accounts, and traveler’s checks) was roughly 5.5.³ Velocity of money is, in fact, similar to inventory turnover; the M1 velocity of 5.5 means that the M1 money supply changes hands roughly 5.5 times per year. Each extra dollar is taxable income not only for the worker who receives it, but also to the individuals and entities through whose hands it passes.

Higher wages have had a traditional association with inflation, which happens when too much money chases too few goods. Laws that raise the minimum wage in the absence of increased productivity are therefore likely to be counterproductive, as shown in Figure 1. Assume that the price of a product or service goes entirely toward wages and profits, and we ignore for the sake of simplicity the portion necessary to pay for materials, energy, and overhead (or can treat these as fixed costs even though they are often not). Now suppose workers are paid to fold 50 pieces of cloth per hour for which they are paid 20 cents each, the equivalent of $10 an hour. The customer pays 30 cents per piece for this work, thus paying the company $15 for an hour’s output, of which $10 goes to wages and $5 to profit. It is clear from figure 1 that, if the government decrees that the worker shall be paid $15 an hour, the business must either forego any profit or raise the per-unit price to 40 cents, or $20 an hour, to see the same profit.

Figure 1: Price = wages + profits (incorrect model)

If we also assume that “folded cloth” represents all the goods and services in the economic universe, the workers’ previous hourly wage of $10 an hour could buy 33.3 pieces of folded cloth at 30 cents each, while the new wage of $15 an hour would buy only 37.5 pieces at 40 cents each. This makes the purported 50-percent wage increase only a 12.6-percent increase in terms of what the money will actually buy.

Waste: the hidden factor

In his 1923 book, The New Henry Ford (Kessinger, 2003 reprint), author Allan Benson confirms very explicitly what students of Henry Ford’s business system have long inferred.⁴ “Mr. Ford is a billionaire only because he sells automobiles and tractors for less than they were ever sold before, and pays the mechanics who make them more than mechanics were ever paid before.” This kind of bottom-line performance for every single relevant interested party in his supply chain tells us that we ought to look closely into how he achieved this, and then act on it. Ford recognized that the real relationship between wages, prices, and profits includes a previously invisible factor:

Price = wages + profits + waste

A good way to put this into perspective is by comparison with the discovery that only 4 to 5 percent of the universe consists of ordinary matter.⁵ The rest consists of dark energy and dark matter that cannot be detected and play no apparent role in our everyday lives. Waste is similar to dark matter because it is largely invisible and can comprise up to 95 percent of an organization’s activity (if not more). Wasted cycle time can exceed 99 percent. Unlike dark matter, however, its impact is very real despite its relative invisibility. Ford, who grew up on a farm, wrote explicitly, “I believe that the average farmer puts to a really useful purpose only about 5 percent of the energy that he spends.... Not only is everything done by hand, but seldom is a thought given to logical arrangement. A farmer doing his chores will walk up and down a rickety ladder a dozen times. He will carry water for years instead of putting in a few lengths of pipe.”⁶ The proposition that waste can eat up 50 percent, or even more, of the sale price is therefore highly realistic.

Let us return to the fabric-folding example. Edward Mott Woolley described a fabric-folding operation in a bleaching and dyeing factory in Wilmington, Delaware, as follows: “But all [employees] took two steps to the right to secure their cloth, returned to the tables, folded the stuff, and deposited it on another pile two steps to the left. That had always been the practice; no one had ever thought to question it.”⁷

Walking is a form of waste motion, which is one of the Toyota Production System’s (TPS) Seven Wastes. The original situation, in which workers might be paid 20 cents per unit in today’s money to fold 50 pieces of cloth per hour, was therefore really more like the output shown in figure 2.

Figure 2: Price = wages + profits + waste

When the incoming and outgoing work were moved next to the tables, the workers could fold twice as many (100 rather than 50 an hour). If we reduce the piece rate from 20 cents to 15 cents per unit, the workers will now earn the equivalent of $15/hour (100 x 15 cents), a 50-percent increase in hourly earnings, from $10 to $15 an hour. We can simultaneously reduce the customer’s cost from 30 cents to 25 cents per unit, thus grossing $25/hour, of which $15 goes to the employee, and still double our profit into the bargain, as shown in figure 3.

Figure 3: Price = wages + profits without waste motion

The wage increase will not be inflationary because, if we assume that “folded cloth” symbolizes all the goods and services in the economic community, 50-percent more dollars will chase 100-percent more goods. If $10 an hour previously bought 33.3 units of output at 30 cents per piece, $15 an hour will now buy 60 units at 25 cents each, which means the workers have really received an 80-percent increase in terms of what their money will actually buy.

This example should have demonstrated clearly that “savings” on labor, whether through paying workers as little as possible or shipping jobs to low-wage countries to enable lower prices or higher profits, is a dysfunctional delusion that retards the nation’s economy. The instant an organization recognizes this, it positions itself to work genuine financial wonders. “Unprecedented” would, however, be the wrong word because the stock of the Ford Motor Co. appreciated at roughly 63 percent a year from 1903 to 1919, when Ford finally bought out his stockholders for $2,500 for every dollar invested. This does not even account for dividends paid along the way.

The good news is that waste, unlike dark matter, can be found by anybody who knows what to look for. Inventory, another TPS waste, is directly proportional to nonvalue-adding cycle time, while no known material or energy waste can hide from a material and energy balance. The bad news, however, is that opportunity costs are even less visible than waste and also even more expensive.

Opportunity costs

If waste is the dark matter of industry, in that it does nothing to announce itself, but we can find it if we know where to look, opportunity costs are even less visible, if such is possible. They are totally invisible to the cost accounting system because we cannot write them off on our taxes or include them as losses on an income statement. An opportunity cost relates to revenue we don’t get, or money we don’t save, due to failure to realize an opportunity. The traditional application relates to deliberate choices between two or more projects (or other investments), but the concept also works if we include “do nothing” among the alternatives. Ford defined the principle very explicitly: “If a device would save in time just 10 percent or increase results 10 percent, then its absence is always a 10 percent tax.”⁸ We will see momentarily that 10 percent is essentially chump change when it comes to opportunity costs. 100 percent or even 1,000 percent is often the case.

Consider, for example, the Picchi reference, which includes a video of a worker using a mop to clean what looks like a large warehouse. It takes less than a second to see what is wrong with using a human worker’s muscles to do mind-numbing work that a tireless and uncomplaining machine ought to do. Ford, in fact, did not think domestic animals like horses, much less people, should do heavy labor that can be done by steel backed up with steam, electrical, or internal combustion power. The ballad of folk hero John Henry is about a proud man who matched his strength and skill with a hammer against a 19th-century steam drill, and beat it by driving his steel rod 15 feet into rock while the drill achieved only nine... but then John Henry died of exhaustion. The industrialist’s goal should be to put John Henry behind the steam drill, and pay him higher wages.

The Janitorial Store says that a worker can clean about 5,000 sq ft per hour with a mop and pail.⁹ A riding floor cleaner is available for less than $10,000 that will clean 60,000 square feet per hour. It probably does not require much training to operate, but the bottom line is that it will do as much work as 12 workers with mops. The opportunity cost of not having the machine is therefore about 1,000 percent, even when we account for higher pay for the worker plus the cost of the machine. The idea of paying workers mediocre wages to push mops should therefore be as distasteful to intelligent managers as the idea of using shovels for a major excavation job when a backhoe is available. Avidbots leaves the mop and pail even further behind with its robotic cleaning machines: “The Neo autonomous cleaning robot takes the burden of floor scrubbing off your cleaning staff, freeing them to focus on more value-adding tasks” (emphasis is mine).¹⁰

The Benson reference includes an example of an opportunity cost of close to 2,000 percent, even after we account for the cost of the machine and higher pay for the workers. Ford’s associate Thomas Edison encouraged his father-in-law, the president of Buckeye Harvester, to buy a machine for $5,000 that two workers could operate, and that would do the work of 43 who did not have the machine. Even with a daily wage of only a dollar a day (the year is unknown, but this might have been a reasonable wage in the late 19th or early 20th century), the machine would have paid for itself in less than a year while its operators could have been paid a lot more.

A video of cotton picking during the 1940s shows agricultural workers performing hard, backbreaking work by bending over to pick cotton and then dragging it around in bags that could weigh up to 70 pounds by the time they could deliver it for collection and weighing. The same video then showed cotton harvesting machines, probably based on John Rust’s design, each of which could do the work of 50 manual laborers. Radio Free Europe reports, however, “Uzbek Cotton-Picking Claims Eighth Victim,” and the article shows people in Uzbekistan picking cotton by hand in 2013.¹¹

The article adds that each person has a daily quota of 40 kg, or 88 lb, and that the labor is compulsory. The best case (for the investors) and the worst case (for the workers) is that they are a form of robot. Not a mechanical worker, but from the Czech word robota, a forced laborer in a feudal system for which the workers receive no compensation other than sustenance. It is difficult to envision even the cost of buying or renting a cotton harvesting machine, and paying one person good wages to run it and perhaps another to maintain it, exceeding the cost of subsistence for 50 unpaid workers.

Another takeaway from this discussion is the proposition that offshoring work to low-wage countries is simply a way to sweep waste and opportunity costs under the rug. The concept is the same as that of inventory that gives defects and other forms of waste a place to hide. If we keep enough inventory to cover up whatever issues we might have, we do not have any immediate incentive to identify and remove their root causes. If we ship jobs offshore for cheap labor, we don’t have to address the underlying waste or opportunity costs, either. If the low-wage country discovers that it can address the root causes, its next logical step will be to question why it should be working for us at all, go to work for itself, and take away our market share entirely.

Opportunity cost vs. waste

Opportunity cost looks, so far, very similar to waste because removal of either enables higher wages, higher profits, and lower prices. We could even say that failure to remove waste is an opportunity cost. If we want to differentiate them, however, waste is finite, while opportunity cost is theoretically infinite. Frederick Winslow Taylor noticed, for example, that the manner in which many steelworkers loaded pig iron onto railroad cars was motion-inefficient to the extent that the job wasted 73 percent of the worker’s labor.¹² They could carry and load 12.5 tons a day with the existing methods, and 47 tons a day with Taylor’s. It’s conceivable that Taylor’s methods could have been improved even further, but there is certainly a hard finite upper limit on the amount of pig iron that people can lift, carry, and load into a railroad car.

As yet another example, suppose it takes two kilowatt-hours of energy to manufacture a product that can, in theory, be made with one. This is something we might consider under ISO 50001:2018. We can improve efficiency up to 100 percent by removing all the waste from the process, but we cannot improve it further.

The same principle carries over into mopping floors and picking cotton by hand. Removal of all waste motion from the mopping job might, for example, allow the worker to clean 6,000 rather than 5,000 square feet per hour, but there is a hard upper limit on what can be done with a mop. The best method of picking cotton by hand might increase a worker’s efficiency by 10 or 20 percent, but he is still picking cotton by hand. The automatic floor cleaners and cotton-harvesting machines show, on the other hand, that there is no theoretical upper limit on opportunity costs, although there may be a practical one somewhere. This underscores the need to always question whether we are doing the job the best way possible because it is highly likely that we are not.

Stoop labor does not belong in the 21st century

Various sources complain that agricultural workers are exempt from minimum wage laws and can earn as little as $11,000 a year for full-time, backbreaking work, such as that involved in picking crops. Student Action with Farmworkers (SAF) says that sweet potato harvesters get paid 40 cents per bucket, or $25 per ton.¹³ I found a video of sweet potato harvesters bending over to harvest these tubers, and then carrying them to an agricultural vehicle for collection. That rumbling noise from Dearborn Michigan is Henry Ford spinning in his grave.

A Google search on “stoop labor” brings up, as the first result, “agricultural labor performed in a stooping or squatting position.” Ford told us roughly 100 years ago that no job should ever require anybody to take more than one step in any direction (much less to carry heavy buckets of sweet potatoes for collection) or bend over. Frank Gilbreth told us almost 110 years ago that bending over to pick up bricks from the ground does not create value for which the workers can be paid, and he proved it wastes 64 percent of their labor.¹⁴ I nonetheless found, on YouTube, a video of a brick layer walking and bending over to get bricks and mortar, and more than one video of roofers carrying heavy bundles of tiles up ladders, even though conveyors and lifts are available for this job. If Ford, Gilbreth, and Frederick Winslow Taylor would have been appalled at the sight of farm workers performing stoop labor, modern managers should find this waste of labor equally repugnant, and anybody with profit-and-loss responsibility for the operation should want it corrected yesterday if not sooner.

There are agricultural machines that will harvest sweet potatoes automatically and require only one driver who can be paid moderately good wages. A less sophisticated machine requires manual labor to sort the sweet potatoes, but the workers perform this task while seated in a moving vehicle; they neither walk nor bend over. The farmer can pay the workers higher wages, charge less for the sweet potatoes, and make more profit simultaneously.

All of this leaves a supposedly unanswered question: What happens to all the workers who are displaced by machinery?

Henry Ford 1, Luddites 0

An article in The Guardian warns, “Robots will destroy our jobs—and we’re not ready for it.”¹⁵ This is but one of many examples. The Luddites have been saying this sort of thing for almost 2,000 years, and they have been universally wrong for almost 2,000 years. The Romans rejected an animal-propelled push scythe called the vallus, which was far more efficient than the scythes wielded by agricultural workers well into the 19th century, because they were afraid it would put slaves out of work. Queen Elizabeth I, one of Britain’s most capable monarchs, later refused to grant a patent for an automated knitting machine because she was afraid it would put hand-knitters out of work.¹⁶

Ford, however, kept hiring more workers at higher wages despite his enormous productivity gains. He wrote of this, “The theory that efficiency and better methods make for unemployment is pernicious, but it is widespread.... It all goes on the theory that there is only so much work in the world to do, and it must be strung out.”¹⁷ This has never happened, and it almost certainly never will.

The pre-Ford automobile was made by highly inefficient methods and was therefore a luxury item for wealthy people. Ordinary people used horses and, where available, street cars and trolleys. Ford got the price of the Model T low enough that it was cheaper to own and operate than a horse (noting that the latter requires food and veterinary care regardless of whether it is working), and economically competitive with public transportation. He, therefore, despite his company’s phenomenal efficiency improvements, had to hire more workers to make millions of cars. He also explained very clearly how he achieved this: “The task of industrial leadership is not to find jobs for as many men as possible but to find high-priced jobs for as many men as possible, and the start has to be with a few high-priced men. For not otherwise can the low costs be attained which will increase consumption and make more high-priced jobs necessary” (emphasis is mine).¹⁸

Where will this take us?

In Benson’s interviews with Ford, he predicted that we would one day be able to produce all the necessities of life with 2 percent of our time, or 3 percent of our waking hours; that is, with less than a 3.5 hour work week. When tenfold efficiency improvements are realistic, and even fifty-fold is possible (as shown not only by the cotton harvester but also Ford’s Highland Park plant as of 1915), this is not an unrealistic projection. Ford added that we would of course want more than just necessities, so we might still have to work more hours to get them, but perhaps less than 40 hours a week. The pre-Ford work week was typically 10 hours a day, including Saturdays, for 60 hours, so Ford succeeded in reducing it by 33 percent roughly 100 years ago. Nothing says that the enormous efficiency improvements of which our society is clearly capable cannot reduce it even further while elevating our standard of living.

Benson adds that he then spoke with Thomas Edison, who asked, “What will people do when machinery does everything?” and then answered his own question: “Manufacturers can then afford to pay any kind of wages.” This should be our desired destination, and the basic principles for getting there have been around for more than 100 years. We have surrounded these principles with the language of quality and lean manufacturing, but the principles themselves remain unchanged. All we need to do, as individual quality practitioners as well as a nation, is to put them to work.

References
1. Picchi, Aimee. “Almost half of all Americans work in low-wage jobs.” CBS News, Dec. 2, 2019.
2. Pickert, Reade. “For 53 Million Americans in Low-Wage Jobs, a Difficult Road Out.” Bloomberg, Nov. 7, 2019.
3. Federal Reserve Bank of St. Louis (FRED). “Money Velocity.”
4. Benson, Allan L. The New Henry Ford. Funk and Wagnalls, 1923, p. 11.
5. Moskowitz, Clara. “What’s 96 Percent of the Universe Made Of? Astronomers Don’t Know.” Space.com, May 2011.
6. Ford, Henry, and Crowther, Samuel. My Life and Work. Doubleday, Page & Co., 1922.
7. The System Company. How Scientific Management is Applied. A. W. Shaw Co. Ltd., 1911, p. 41.
8. Ford, Henry, and Crowther, Samuel. My Life and Work. Doubleday, Page & Co., 1922.
9. The Janitorial Store. Cleaning Production Rates for Beginners.
10. Avidbots. Autonomous Robot Cleaning Platform.
11. Radio Free Europe/Radio Liberty, 2013. “Uzbek Cotton-Picking Claims Eighth Victim.” Oct. 2013.
12. Taylor, Frederick Winslow. 1911. The Principles of Scientific Management. Self-published monograph, 2011.
13. Student Action with Farmworkers (SAF). Facts about North Carolina Farmworkers.
14. Gilbreth, Frank B. Motion Study. D. Van Nostrand Co., 1911.
15. Shewan, Dan. “Robots will destroy our jobs—and we’re not ready for it.” The Guardian, Jan. 2017.
16. Coniff, Richard. “What the Luddites Really Fought Against.” Smithsonian Magazine, March 2011.
17. Ford, Henry, and Crowther, Samuel. Today and Tomorrow. Doubleday, Page & Co., 1926.
18. Ford, Henry, and Crowther, Samuel. Moving Forward. Doubleday, Doran, & Co., 1930.

About The Author

William A. Levinson

William A. Levinson, P.E., FASQ, CQE, CMQOE, is the principal of Levinson Productivity Systems P.C. and the author of the book The Expanded and Annotated My Life and Work: Henry Ford’s Universal Code for World-Class Success (Productivity Press, 2013).