It’s been a few weeks since news broke of the layoffs at GM, but for one obvious reason we can’t let it go.
And the reason? Well, we’re living in good times (aren’t we?), and massive layoffs don’t happen in good times (do they?).
We know from his days as a reality TV host that the president is an expert on hiring and firing. Why is he so surprised by GM? He surely understands that this is reality economics, not a game show. There are a handful of winners and many, many losers.
Let’s start with the losers: Most of the cuts are middle class jobs. Ironically, the cuts were made in part because GM hasn’t been successful at marketing the Chevy Cruze sedan. Middle America doesn’t care much for it. Gas is cheap, for now, and Middle America is buying crossovers, trucks and SUV’s. So goodbye, Cruze (and Volt, Fiesta, Fusion, Taurus, etc.).
The GM layoffs make sense from a financial economic perspective. Modern auto assembly plants produce one specific vehicle, so if that vehicle is phased out, the plant is no longer needed. Further, with automation and robotics, it now takes far fewer employees to build vehicles. An industry that employed 11.5 workers for every hundred vehicles produced in 1990 now needs only 6.5 to do the same work.
The president is attempting to jumpstart American manufacturing via tariffs and tax cuts. But a harsh reality has settled in. Companies were given a massive tax cut so they could employ and pay more, not fewer people. Tariffs were levied to protect American jobs, not destroy them. That’s not happening. Why?
Tariffs have increased costs and led to job cuts, not growth. By cutting the corporate tax rate, the new law actually reduces incentives for companies to make capital investments. Companies are allowed to write off the cost of investments in productive equipment over time, creating a tax subsidy for corporate investing. The twist, however, is that the subsidy is reduced when the tax rate is cut, making it more expensive to invest.
This applies to wages as well. With the current tax cut, the cost of increasing wages by a dollar has gone from 66 to 79 cents. In today’s investment markets, shareholders want that money for themselves, not for the employees. And investors usually win those arguments.
At the very essence of the wage problem is productivity. Labor productivity growth has been slowing over the past 40 years; therefore, so have employee earnings. While real GDP has grown at an annual average of 2.63 percent, real weekly earnings have grown less than 1 percent since 1979. When it comes to income, the only thing growing is the share earned by the nation’s top 1 percent — the owners of the capital, not the labor.
Future corporate investment will continue to emphasize automation and robotics, and not just when it comes to manufacturing goods. Robotics are now being used to process the routine paperwork that once provided jobs for office workers, making those jobs a thing of the past.
So here it is: Apple has announced plans to hire another 20,000, and GM is laying off over 14,000. Whether things are going well for you depends on what you do and where you do it. Are you a tech worker in California? You’re making six figures and living in an upscale home. Are you an auto worker in Ohio? You’re worried about having a job next month.
Both Ohio and Michigan have been the hardest hit in the restructuring of the car business. These battleground states, which the president would like to keep in his corner, have lost more than 140,000 of the 415,000 jobs that existed in that industry 30 years ago. Alabama and Kentucky have picked up about 100,000 of those jobs — but overall, employment in the industry has fallen. Look for this trend to continue across manufacturing. If you work for a living, it’s time to retool your skills, or you won’t be working for a living.
Two things are certain in this economic reality show: 1) there will be hiring, and 2) there will be layoffs. Both are a natural consequence of long-term economic restructuring. The questions come down to "Who?" "How many?" and "Where?"
Mr. President: Instead of hitting the Twitter account, it’s time to enable more of us to thrive in this new reality.
Steven C. Isberg is associate professor of finance in the University of Baltimore’s Merrick School of Business. His email is email@example.com.