You know there’s a troubling talent gap when, in the same week that 900,000 Americans filed for unemployment, manufacturing executives themselves were forced to fill in on factory floors – as the Wall Street Journal reported.

Manufacturers have been trying to solve this problem for 20-plus years, proffering any number of solutions. I’ve written about several, including the one I think has the most promise: forming multilayered collaborations to build stronger talent pipelines and provide workers with the support (training, transportation, childcare and otherwise) they need to do their jobs.

Initiatives like these can undoubtedly make a difference. But they take time, and there’s no guarantee they’ll work. Manufacturing leaders realize this, which may explain why I’ve recently had several conversations around another potential solution, a seemingly simpler one that has long been an elephant in the room: raising wages.

The math seems straightforward. Let’s say you pay workers $13 per hour at your factory. You figure that bumping them to $16 will cost you an additional $7,000 per year, per employee. But your average tenure for entry-level hires is four months. So three times a year you have to reinvest in posting the job, interviewing candidates, and onboarding and training new hires; that costs $4,000, including HR and training time, for each new job.

Even worse, it hinders your productivity. The time between losing one person and hiring someone new might cost you $10,000 in lost productivity. More likely, you pay your remaining team an additional $3,000 in overtime to maintain production. Even then, replacing that one worker costs you around $15,000 – more than double the cost of paying them more, which would reduce turnover.

There’s also an opportunity cost when factory jobs go unfilled. Equipment and space you paid for sit idle; sales leads are ignored because you won’t be able to fulfill the orders if you get them. These costs are harder to calculate, but they’re very real.

For most manufacturers, raising wages will sound like a simplistic solution, in part because if it’s done in isolation it might not be as effective as you’d imagine. But it has been proven to work. To show how, I’ve turned to Susan Helper and Raphael Martins’ “The High Road in Manufacturing” from 2019’s Creating Good Jobs: An Industry-Based Strategy, from MIT Press. Here’s what their work can tell us.

Falling Wages, More Temp Workers

In the 1980s, as manufacturers began outsourcing jobs and reorienting their organizations around core competencies, wages in manufacturing began to stagnate and eventually declined: Between 2003 and 2013, for instance, real wages for manufacturing workers went down by 4.4 percent.

At the same time, in response to low-wage overseas competition, American manufacturers increasingly relied on temporary, lower-paid workers. One government report estimates these workers now number over a million, half of whom – and one-third of all manufacturing production workers – “rely on food stamps or other federal assistance programs to make ends meet.” These numbers have likely only risen since the pandemic began, as a growing legion of unemployed Americans sought interim work.

Helper and Martins remind us that manufacturing workers on average continue to earn a significant wage premium – but, as they also note, that premium has shrunk by about a quarter since the ‘80s, thanks to the rise in temporary workers, foreign competition, the decline of unions and other factors.

Though globalization may have been the major push behind such trends – in which wages declined alongside a drop in full-time workers – not all comparable nations suffered as much as the U.S. Germany, where manufacturers pay higher wages than their U.S. counterparts, maintains 19 percent of its workforce in manufacturing compared with 9 percent in the U.S. And since 2005, Germany has increased this proportion, while in the U.S. it has decreased by 15 percent.

The Case For Raising Wages

How can the Germans get away with paying workers more? After all, they’re competing with the same Chinese manufacturers. Turns out, the Germans’ inflated wage scale may actually be part of their advantage. Helper and Martins make the case that manufacturing firms “with higher wages per employee have more skilled workers who also work more effectively.” It follows, then, that manufacturers who pay higher wages might be more effective in attracting skilled workers, thereby alleviating the talent gap – and increasing productivity to a level that more than offsets their increased labor costs.

In some ways, this idea – that the more you pay your employees, the more productive they are and therefore the more competitive your organization will be – is not new. There is, for example, Professor Wayne Cascio’s well-known comparison “of higher-wage (and benefits) Costco with lower-wage (and benefits) Sam’s Club” from which he concludes that “the issue is not what people cost but what they can do, their innovativeness and their productivity.”

For their part, Helper and Martins outline three factors by which higher wages have proved to drive up productivity to cover the increased cost:

1.      They can attract workers with more and better skills;

2.      Higher wages can “buy” increased morale, lower turnover and thus higher productivity; and

3.      These so-called “high road” firms tend to adopt other practices (greater responsiveness to workers’ concerns and suggestions, more worker independence, etc.) that “increase the return to having talented and dedicated workers.”

Numerous statistics from their analysis back this up: For instance, low-productivity auto supply firms pay almost 30 percent less than high-productivity firms. I’d also argue there are real benefits on the cost side as well.

When it comes to adopting other “high-performance management strategies” that support committed and productive workers, Helper and Martins point to practices like in-house training and promotion, cross-training and giving employees more autonomy over their work.

Such practices can naturally flow into wage increases. At Pridgeon & Clay, one of the largest independent manufacturers of stamped and fine-blanked automotive components in the U.S, the coupling of in-house training and in-house promotion led to 90 percent of new job opportunities being filled from within; what’s more, 90 employees received promotions in 2008-2010, with an average wage increase ranging between 17 and 25 percent. Pridgeon & Clay’s overall performance, meanwhile, has proved recession-proof: Net earnings in 2010 were at an all-time high, and as growth continued, their employment more than doubled between 2009 and 2015.

Obstacles To Higher Pay

If the macro-level data suggests that higher wages in manufacturing can be offset by higher productivity – especially with the adoption of complementary strategies – then why do manufacturers remain resistant?

Helper and Martins suggest that it’s (understandably) difficult for firms to make the investments necessary to do so – whether that’s because they don’t know how to measure the benefits of these investments or because they don’t produce the collateral investors expect. Firms that buy from manufacturers often have purchasing policies that place excessive importance on low unit prices, which doesn’t help. What’s more, wages are notoriously sticky: Manufacturers are (again, understandably) nervous that once pay goes up, they won’t be able to bring it back down if the market shifts.

And yet if the alternative is losing out on productivity and output due to persistent job vacancies – or putting your CFO to work on the production line – manufacturers may want to seriously consider: Is experimenting with higher pay worth it?

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *