Higher Wage for Higher Age

In America, it is traditional that the longer you are with a company the higher salary that you will make. Therefore 50 and 60 year olds make more than 20 and 30 year olds. This tradition gives a surplus to society by allowing American salaries to keep pace with increasing living standards and to cover higher mid life expenses such as college tuition for children. There was a recent article in the New York Times about how Circuit City laid off 8% of its workforce because their workers were being paid too much. So they eliminated jobs and will replace the laid off employees with new employees who will accept lower salaries. Obviously, they laid off the older workers rather than the younger workers. This is not an employment law class so I won’t go into detail about age discrimination. Economically, we know that paying workers based on ‘time on the job’ isn’t the most productive way to have a salary base. Paying a salary based on performance or productivity makes more sense. Those with more experience would receive higher pay due to prior knowledge and learning curve that in turn would relate to a higher output. The move by Circuit City however, is a very aggressive move to cut costs. 3,400 people will now no longer be able to afford their product and the PR nightmare that will ensue is going to cost them in advertising and legal fees. So is this a good move? I am sure there are a lot of companies that will be watching Circuit City real close in the upcoming months to observe the fallout of this attack. If Circuit City escapes unscathed then more companies will follow suit and start eliminating higher paying positions and then rehiring those same positions at a lower wage. I seriously doubt that the overall benefit to society is going to be positive. Less pay to Americans leads to a lower living standard. We are so worried as a county about increasing every other country’s standard of living, maybe we need to look in our own backyard first. When did increasing the dollar to the shareholder become more important than the dollar to the worker who produces the product? How is the shareholder going to get that dollar if no one can afford to buy the product?


Sebastian said...

I think that Jada has made some good points here. I also think that it would depend upon the industry to determine whether or not a firm could lay off their higher paid employees. In many firms, knowledge and experience is in high demand. If a firm was to lay off employees who had a lot of knowledge and experience, it may hurt the company in the long run. It could also hurt the company's culture. Overall, I think that there could may many factors that a firm would need to consider before laying off senior employees.

Dr. Tufte said...

This compensation practice is known as backloading. It is a sensible thing for a firm to do when training costs are high, or when loyalty is (more than normally) important.

A big problem with backloading is that there is always the problem that the firm may change their strategy after getting workers to agree to it. This is called a time inconsistency problem.

For my part, I wonder exactly why Circuit City was dumb enough to have this policy in the first place. It doesn't seem to me that they qualify for either high training costs, or higher required loyalty. I think it quite possible that this was a bad choice in the first place, and that management is trying to correct it (not that correcting it at the expense of workers is a nice thing to do).

Matthew said...

Dr. Tufte talked about backloading. I agree that Circuit City doesn't have high training costs nor do they require high loyalty. My only guess on why this practice was started was because managers felt that they had to go along with the “norm” that the longer you work there, the more you should get paid. I can see how this practice could be advantageous to Circuit City in the beginning, because they may have had high turnover costs from employees quitting to go work at a another job that will offer them ten more cents an hour. However, after a certain point (and obviously Circuit City has gotten there), these cost savings for turnover turn into great costs for credibility and HR.

William said...

Dr. Tufte,
We constantly hear in the news of companies downsizing and cutting people. But, what makes me upset is why did they hire them in the first place. It seems that every company thinks that by firing people they are going to cut so much money, when in fact many times it is worse for the company. I hate it when companies hire so many people and then in a few years they fire the majority of them. Why even hire the people in the first place? That would save costs!

Dr. Tufte said...

William: I think the real economic issue here is that it just isn't that easy.

But ... then the moral issue is that if it is so hard to figure out how many people you need, then you shouldn't backload.