Why Hire?

Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business, suggests that rather than think of our sluggish recovery as “jobless,” we really should be thinking of it as “hireless”:

For most organizations, people are a means and medium to an end. They’re not hiring employees, they’re hiring value creation. If they can get that value — or most of it — from contingency workers, outsourcing, automation, innovative processes or capital investment, why wouldn’t they? If tweaking a process or program empowers three people to do the work of five, then tweakonomics is the way to go. The profound difference between today and 2005 is that good hires looked like better investments than great tweaks back then. In 2010, good tweaks look like better bets than even great hires.

The higher the hiring costs, the smarter exploring alternatives becomes. The 21st-century result is that growing the business has decoupled from growing the workforce. Even at human capital intensive professional services firms, strategic challenges seem to have morphed into, “What’s the maximum amount of value we can create for clients with the minimum number of employees?” Head-count reduction or eliminating hires isn’t the goal. But today’s organizations want to get far greater value from existing human assets before making the next hire. To put this more crassly: better to first buy 1,000 iPhones and BlackBerries than hire 10 world-class project managers. Is this an exaggeration? Talk to top project managers. Talk to their employers. Then ask yourself: For most of the organizations you know, what would be the better investment?

Schrage observes that uccessful U.S. firms are increasingly investing in integrated systems in lieu of expanding their payrolls, but of course this dynamic also obtains in (relatively) low-wage countries, like China and India.

The self-service ethos of ATMs, hotel check-ins, and Zipcar rentals is another market signal that companies would rather invest in integrated systems than hire people. What could be more minimum wage than a supermarket checkout cashier? But growing numbers of retailers now bet that expensive self-checkout machines represent both a better business investment and customer experience than low-paid humans-in- the-loop. Wal-Mart is by far America’s largest employer with roughly 2.5 million employees worldwide. It’s made enormous investments in innovative technology. Amazon has roughly 25,000 employees. It’s made enormous investments in innovative technology, too. A decade of slower growth hence, where in the employment middle might you expect them to meet? What do you think their new hires will have in common?

Firms are asking themselves whether or not hiring workers is the best, cheapest way to achieve their objectives:

A decade ago, the answer was usually “yes.” Today, the answer is usually, “We’re not sure.” Increasingly, the answer will be “Not really, unless they’re really, really good.”

This is why I find the minimum wage debate so frustrating. The shrewder advocates of minimum wage increases have been accusing conservatives who favor wage subsidies of being “pro-welfare Republicans,” as a minimum wage increase is (somehow) a more authentically free-market way of raising incomes at the low end of the labor market. What these critics don’t fully appreciate is that many business enterprises are discovering attractive alternatives to hiring, in part because of rising uncertainty around future employment costs. We’re getting to a point where firms have very weak incentives to train workers with limited cognitive and non-cognitive skills, and that is making it harder for workers from disadvantaged backgrounds to start climbing the first rungs of the jobs ladder. Recall University of Minnesota transportation economist David Levinson’s provocative vision of the future. Levinson envisions a world in which almost half the population doesn’t enter the paid workforce until age 30, as firms lose interest in financing training. Instead, most people go through an extended apprenticeship period that can last as long as a decade, combining unpaid internships and attending school online. And most people exit the workforce by age 60, as technological advances reduce the value of older workers. If Schrage is right, the shrinking labor force participation we are seeing today, to which the new Obamacare health insurance subsidies will contribute, will prove to be a structural rather than a cyclical change. And if that is indeed the case, we need to start asking how we intend to organize a society with such marked disparities when it comes to family structure, impulse control, and attitudes towards work.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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