Better paid and better trained workers equals more productivity
Randolph T. Holhut: 'A simple formula: Better paid and better trained workers equals more productivity'
Posted on Thursday, July 21 @ 10:11:58 EDT
By Randolph T. Holhut
DUMMERSTON, Vt. - Republicans seem to love the slash-and-burn style of modern capitalism. However, it is not a economic model that is sustainable and there are a few smart business out there who reject it and profit from that decision.
Those who complain that spending money on public education and health care is a drain on the economy might want to consider this story from Canada.
Earlier this month, the Canadian Press reported that Toyota decided to build a new $800 million auto assembly plant in Woodstock, Ontario. It will employ 1,300 people.
Toyota passed up hundreds of millions of dollars in subsidies and tax breaks from several American states to build in Canada.
Why? Toyota believes that workers in Ontario are easier and cheaper to train than their American counterparts. They also won't have to worry about health insurance costs because of Canada's taxpayer-funded single-payer health care system.
"The level of the workforce in general is so high that the training program you need for people, even for people who have not worked in a Toyota plant before, is minimal compared to what you have to go through in the southeastern United States," Gerry Fedchun, president of the Canadian Auto Parts Manufacturers' Association, told the CP.
Ontario and the Canadian government are giving Toyota $125 million in financial aid for research, training and infrastructure costs. Apparently, several U.S. states were prepared to offer much more than that, but Fedchun told the CP that any extra money would have been eaten up by additional training costs.
"The educational level and skill level of people down there (Mississippi and Alabama, where Nissan and Honda have auto plants) is so much lower than it is in Ontario," he said, adding that in Alabama, trainers had to use pictures to train illiterate workers how to run high-tech plant equipment.
As for health care, Canadian Industry Minister David Emmerson said that Canadian workers on average are $4 to $5 an hour cheaper to employ than Americans, mostly due to Canada's health care system.
"Most people don't think of our health-care system as being a competitive advantage," Emmerson told the CP.
General Motors certainly thinks it is. According to GM CEO Rick Wagoner, about $1,500 of the cost of each vehicle the automaker produces in the U.S. goes for employee health care costs. By comparison, employee health care costs in Canada amount to only $120 per vehicle.
That's why GM is cutting fewer jobs in Canada than in the United States. And that's why other manufacturers are looking at Canada - the combination of skilled workers and cheap health care costs are hard to ignore.
The Toyota story shows that throwing money at corporations to entice them to move to your state doesn't work if you have unskilled, semi-literate workers.
And single-payer health care - something that every other country in the industrialized world has - removes one of the biggest financial drains that responsible companies have to deal with.
Sure, you can be like Wal-Mart and offer no benefits to your workers. That's why have constant churn in their workforce. But in the long run, it's better to pay your workers a decent wage and offer them decent benefits because in return, you end up with a more efficient, more productive workforce.
The exemplar of this theory is Costco, currently the nation's fifth largest retailer. Costco's average hourly wage ($16) is nearly double that of Wal-Mart's ($9.68) and Costco pays 92 percent of employee's health insurance premiums with no deductibles while Wal-Mart only covers 66 percent and tacks on a $350-$1,000 deductible.
Business Week did a study last year comparing Costco's and Wal-Mart's business models. They found that Costco employees are more productive and sold more merchandise. In addition, Costco has lower labor costs as a percentage of total sales than Wal-Mart.
The average rate of employee turnover in retail sales is 65 percent, as estimated by the National Retail Foundation. Wal-Mart's turnover rate is 50 percent. Costco's rate is about 24 percent. Higher retention rates mean less money spent on recruiting and training new workers.
Granted, there are big differences between Costco and Wal-Mart. Costco's customer base is wealthier and spends more on a smaller selection of high profit-margin items. Costco is a members-only warehouse club and doesn't advertise. Costco allows its workers to join unions. And most importantly, Costco's executives take less profit. Costco CEO Jim Sinegal received $350,000 in 2004. Wal-Mart CEO Lee Scott got $5.3 million last year.
About the only people that hate Costco's business model are investors. Wall Street demands low upfront labor costs and high stockholder returns - the Wal-Mart model. But Costco's stock price has been steadily increasing - quadrupling in value in the past 10 years - while Wal-Mart's has been slowly declining - about 5 percent in the past year - despite high profits and rapid expansion.
Toyota's decision to spurn lavish subsidies by the southern states to hire smarter, better trained workers in Canada and Costco's continued profitability while paying their workers middle-class wages show that a company will have more productivity at a lower long-term cost by paying more for better workers.
This model might be at odds with slash-and-burn capitalism, but Toyota is selling more cars and trucks- 2.2 million last year - than ever before and doesn't have to bribe customers to buy its products and Costco is making more money per store than Wal-Mart despite higher labor costs.
Huge short-term profits are seductive, but steady long-term profitability is always better. The smart people in business know this and the best way to achieve is to attract and keep good workers.
Randolph T. Holhut has been a journalist in New England for more than 25 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at email@example.com.