Tuesday, April 03, 2007

Lessons from Circuit City

David Leonhardt has an interesting piece in the NYTimes today:
One Safety Net Is Disappearing. What Will Follow?

Over the years, American companies have built a pretty extensive social safety net for their workers. The clearest examples of it are pensions and health insurance, which became popular during the wage freeze of World War II, when employers were looking for creative ways to give raises. Today, the United States is the only major country in the world where the private sector plays such a big role in caring for the old and the sick.

But the corporate version of the welfare state is not just about retirement and health care. Another, much less obvious, piece of it is the steadily increasing pay that most workers receive over the course of their careers.

...This somewhat uncomfortable fact was a big part of the extraordinary layoff announcement from Circuit City Stores last week. On Wednesday, the company dismissed 3,400 people, or about 8 percent of its work force, not because they were doing a bad job and not because the company was eliminating their positions. Instead, executives said the workers were being paid too much and that the company would replace them with new employees who would earn less.

...There is a real question about whether these chains will hurt themselves in the long run by damaging employee morale, customer service and, ultimately, productivity. (Circuit City is forcing fired workers to wait 10 weeks to reapply for their jobs, I assume because the company executives were afraid that workers whose pay had been cut wouldn’t make effective sales associates.)

But there’s no question that corporate America is moving in the same direction as Circuit City. Companies are wringing out what they see as inefficiencies, like traditional pensions and health insurance coverage, and tying workers’ pay more closely to their performance.
Like Leonhardt, I did indeed find Circuit City's decision last week to be quite striking. My first thought, however, was "what a stupid, short-sighted move," for exactly the reasons that were mentioned above. There are good reasons why firms sometimes pay wages that are a bit higher than face-value productivity to individual workers, and for Circuit City to ignore that fact suggests that the quality of CC management could be improved.

But the Leonhardt piece seems to be missing a crucial part of the story. Can we get any insight into why corporate America is just now trying to "wring out inefficiencies"? The story-line of corporations sacrificing workers to improve the bottom line in the short term has been repeatedly told for the past quarter-century, at least.

So we have to move on to the next part of the question: given that corporate management is just as willing to sacrifice workers for the sake of the bottom line as they've ever been, is there any reason why we should think that management is better able to demand lower wages from their workers than before?

Many observers, including Mark Thoma, have suggested that perhaps there is such a reason: globalization. And I would agree with them, at least when it comes to workers in tradeable-goods industries.

But as true as that may be for industries like manufacturing, in this case the globalization effect doesn't make much sense. Imports have dramatically driven down the cost of Circuit City's inputs (consumer electronics), which should have improved CC's bottom line, while at the same time imports provide little competition for Circuit City's workers. After all, workers in retail stores like CC are pretty much immune to foreign competition, since their jobs can't easily be outsourced to another country.

So while I agree with Leonhardt that the safety net has been severely shredded in the US over the past 25 years or so - and that it's the government's responsibility to patch the holes left behind by changes in the way corporations treat their workers - the first conclusion that I reach from the Circuit City story is much simpler than Leonhardt's: sell Circuit City stock, if you own any, because its managers are apparently incredibly short-sighted, and not all that smart.

There is one other implication of all this, however. While the Circuit City story doesn't seem to have much to do with globalization, it may be a good illustration of the growing imbalance in power between the managers and workers in corporate America today. One can't help but think that such a move would never be possible with a unionized workforce, for example.

So more than anything, I find this story to be a good illustration of the fact that lots of forces other than globalization - and perhaps forces much more significant than globalization - have contributed to the loss of bargaining power of the average American worker.

UPDATE: Some earnings were reported this morning.
NEW YORK (Reuters) -- Best Buy, the consumer electronics retailer, said Wednesday that quarterly profit rose more than 18 percent, helped by acquisitions and increased sales of higher-priced products. Net income for the fiscal fourth quarter ended March 3 rose to $763 million, or $1.55 per share, from $644 million, or $1.29, a year earlier. Revenue increased 21 percent to $12.9 billion, and same-store sales increased 5.9 percent.

NEW YORK (MarketWatch) -- Circuit City Stores Inc. Wednesday reported a fourth-quarter loss of $12.2 million, or 7 cents a share, down from a profit of $141.4 million, or 81 cents a share, in the year-ago period. On a continuing operations basis, the Richmond, Va., consumer electronics retailer lost $15.2 million, or 9 cents a share, in the second quarter. The latest results include pre-tax charges totaling $144.6 million related to the impairment of goodwill, store and facility closures, and other restructuring activities. Sales rose in the three-month period to $3.93 billion from $3.89 billion a year earlier. Same-store sales slipped 0.5% in the period.


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