Protect Income, not Industries, Companies, or Jobs

What if, in order to protect workers, we made it illegal for an employer to fire any employee for any reason? This would not be an especially controversial idea in some circles.

The strategy would backfire. Workers would become less secure as companies became less competitive. Monopolies like government might not be affected, but companies would lose out to businesses with more flexible cost structures. Our economic security would worsen, not improve.

Trying to protect individual companies is like trying to protect individual jobs.We could make it illegal to compete with US firms by outlawing overseas goods and services. Again, there are a lot of people who like this idea. Again however, it produces the opposite of the intended effect: US companies would fail because they could not access skills and resources from wherever in the world they can be produced most cost-effectively. Once again, an attempt to improve our economic security would backfire and leave us with worse problems than we started with. Any state owned enterprise or protected organization like Indian railroads or Japanese banks attests to this.

But economic security is a fundamental and legitimate human need — so how do we meet it? Technology and trade continually create new jobs and wipe out old ones. Overall, the results are excellent – billions of people are moving out of poverty now far more quickly than at any time in human history. At the same time, the jobs that trade and technology create are never suited to those whose jobs they destroy. Global competition is a bracing economic tonic, but a terrifying one if your job, your company, your town, or your industry is being made obsolete. Nobody who works for a living wants to be suddenly unemployed. Worse, the fear of sudden economic dislocation is politically potent. It leads people to embrace solutions like the ones above that not only don’t work — these solutions are like hoping gasoline will put out a fire because it is cold and liquid.

People with secure jobs often like the sound of Joseph Schumpeter’s “creative destruction”. They like the creative part, but people whose jobs are threatened hear only the second word. They rightly worry that they will become just another cost that a company can dump on the public like pollution or pension obligations. It is up to government to transfer the cost of creative destruction from victims to beneficiaries — but what is the least damaging way to do this?

The short answer is that government needs to protect incomes, not jobs, companies, or industries. The reason is simple: no other policy works. Taxing citizens to preserve threatened jobs, companies, or industries subsidizes the past at the expense of the future. On the other hand, forcing individual employees and their families to bear the cost of these changes is politically and ethically unacceptable and reliably produces a protectionist political backlash that undermines the enormous economic and social benefits of globalization.

It is one of the most critical problems for government to get right. Even though the moral case for capitalism rests on using part of the surplus to compensate those badly affected by economic change, Republicans have proven too willing to pass the burden of globalization onto working families . Democrats often have little in their toolbox but tariffs (including soft tariffs like labor and environmental standards).

So how exactly do we do this?

Governments often get these policies backwards because of the political clout of companies and industries exposed to global competition. Last night’s BBC broadcast featured Leo Gerard, president of the Steelworkers Union, announcing an alliance with manufacturing companies (the ones with record high profits and record low employment). The goal of the alliance is to keep low cost products from China out of the US. Leo is a lion, a good man, and a friend — but his agenda fools nobody: in the name of “a level playing field”, he wants tariffs that are a tax on consumers to be paid to his members. The tax makes imports more expensive, increases prices, and reduces the standard of living of everybody except manufacturers and their employees, who become richer. Manufacturers of course love the idea of reduced competition, increased prices to consumers, and higher profits even after the union guys take their cut. What’s not to like?

Trade threatens a small fraction of all jobs, but the psychology of job loss is powerful because the human need for economic security is powerful. As a result, companies, governments, and schools often agree to rules that make it very hard to fire people. These rules are understandable since being fired or laid off can be economically devastating but they often bring about a perverse result: without the ability to replace poor performers, organizations underperform and get wiped out (the major exception being government organizations, which are monopolies with the power to compel people to pay for services. They underperform and don’t get wiped out — nice work while it lasts).

At a personal level, trade and employment policies come down to having to change jobs because either the market or your boss force you to do so. My perspective on this comes from an unusual set of experiences. As an employee, I have been laid off or fired three times. As a union representative, I handled dozens of termination grievances in different industries and learned first-hand that employers can be unbelievably stupid.

I represented an older nurse who was fired for dying the grey out of her hair during her lunch break. (Got her rehired. Years later however, the same employer fired me!). I worked in a large machine shop, where my boss fired a machinist for listening to the World Series on his transistor radio on the job. Claimed that the guy couldn’t hear the machine cutting while wearing an earphone. I got him reinstated by pointing out that you could not only hear these machines in the next county, but that two of the best machinists in our shop were so deaf that I had learned rudimentary sign language in order to be their shop steward. Won that one in an afternoon.

Yet another employer asked me to 86 (quietly evict) a drunk from his restaurant where I worked as a waiter. After I escorted the fellow to the parking lot, he pulled a knife and started swinging it at me. He was far too pickled to be a serious threat, but a cook named Lupe Martinez witnessed the assault from across the parking lot and came flying towards me, swinging his belt buckle hard and high. They fired Lupe for his heroism, so I organized a union at the restaurant and the hotel that adjoined it. Spent the next decade organizing workers. I never saw Lupe after that night and never could help him get his job back.

As an employer and an adviser to employers, I’ve fired several dozen and laid off or advised the layoff of thousands of employees. As an adviser to the Canadian Steelworkers, I stood with Leo to deliver the bad news to workers in a large rural plant. When the dot com bubble burst, I more than once had to lay off friends and colleagues who had bet on me and my company. I have fired friends and people I liked a lot but whose performance tapered off. These are gut-wrenching, tearful experiences — don’t let any economist tell you otherwise.

Firing people is never fun — although one time it was funny. I took a talented woman to lunch and advised her that she had pissed off so many people that she had become a liability and I had to let her go. We had discussed this problem a lot and she was not remotely surprised — in fact, she broke out laughing. She laughed so hard that she could hardly breathe — tears were streaming down her bright red face. When I asked her what was so funny, she finally regained her composure and politely advised me that “you were so nervous about firing me that you squirted mustard from your sandwich all over your shirt”. To nobody’s surprise, she went on to do great things — but the mustard stain never did come out.

My policy and management views about forcing people to change jobs come from time spent on both ends and in the middle of a fair number of terminations. I have learned five lessons about firing people (and many of these lessons I learned not practicing them):

Hire selectively; fire generously. Hiring is a ton of work — it takes time, attention, patience, and experience. I’m still not great at it — I wish I knew who was. I do know that if you don’t work hard at hiring, you will work hard at firing. I try not to hire people for money; I try to find people who are genuinely excited about the work and pay them at or slightly below market. I’d rather save the payroll for a generous severance program and not pay people so much that they can’t afford to leave. At the end of the day, if professional transitions are economically comfortable, they aren’t as big a deal.

Fire for poor performance or to reduce staff — never to punish. Except in extreme cases, firing should not be a punishment and severance should not be a reward. This is a hard lesson for managers who wait until they are angry or a situation is desperately messed up to replace a faltering subordinate. Be generous even to those who are a complete disaster on the job – after all, you were the bonehead who hired them. This may seem expensive, but 2-6 months of severance pay is often a cheap price to improve morale, create room for new talent, and improve performance by cleaning out deadwood. Remember the old joke: “why is a divorce is so expensive?” Answer: “Because it’s worth it.” If you cannot think of a better reason to be generous when firing people, remember that some day your turn will come.

Fire often. Most organizations perform better if they turn over the bottom 2-10% of their workforce each year. If you are hiring well, communicating well, and not overpaying people, some of this will very likely happen naturally through discussions. The best place I ever worked was McKinsey & Co., which fired 10-15% of its elite workforce every year – people who readily found work elsewhere. They were very generous and classy about it and almost everyone who ever worked there looks back on the experience fondly. Nobody wants to be in the bottom quartile of performers over a long period of time — and if being “counseled out” of a company is fairly common, less stigma attaches. And you will be surprised how many people actually appreciate being told it’s time for them to make a change.

Fire fast. Most managers avoid firing and nearly all wait too long. It is not unusual for inexperienced managers to wait years before indicating to a subordinate that it is time to change jobs. Many people stick around even though they recognize that they need a new challenge, hate their new boss, are sick of the work, or are root bound and in need of repotting. Generosity helps those folks on move before business performance suffers. Of course nobody should be surprised that they are getting fired – but there is nothing wrong with moving on quickly. Heck, in Silicon Valley we sometimes worry about folks who stay too long in the same place.

Fire anyway. Union contracts, civil service rules, and academic tenure are no excuse. It is much harder to terminate poorly performing people when employees have contractual rights — that is, after all, why they obtained the rights. But it can be done and is worth doing. Unfortunately, most managers simply give up and decide that they cannot replace people — usually at the advice of HR departments that should have been chucked long ago. There is always a way to fire people in bad need of a good firing. It can be expensive – but it’s almost always worth it.

Colleges, universities, and public schools do an especially poor job of managing the performance of tenured faculty (in fairness, most faculty are highly dedicated, work hard, and motivate themselves – until the day they decide not to). The rationale for academic tenure, that scholars need to have their freedom of speech protected, is complete hogwash. At many universities, including the one I married into, some of the most creative and talented faculty has adjunct positions. They are nontenured, do fantastic work, and have more job security than most private sector employees because they are state employees without a lot of competition. At this point the only sensible argument for tenure is that everybody else has it, so abolishing it puts a school at a competitive disadvantage.

Union members can be fired by managers who are not intimidated. I’ve fired union members and I’ve lost plenty of grievances representing fired union members. Even government employees who are union members can be fired, although there is a good deal of paperwork involved. When I joined the leadership of the U.S. Department of Labor, I discovered an enormous and terribly sleepy organization that had neglected professional development since roughly the Ford Administration. A reasonable manager would replace 5-10% of the staff annually for awhile, just to trim dead wood. Each case took months, but I fired an inspector for painting his car to look like a police vehicle so people would think he was a cop. Canned another who hadn’t shown up for work in three months (AFL-CIO President Lane Kirkland called personally to grieve that one). Altogether, I fired four people for performance during my two years of service – a pathetically low number. But these were the only four people fired for performance in the entire 18,000 person Labor Department during the time I served there. At one point, my staff threw a party because they were so grateful that someone had attempted to deal with the worst of the incompetence that plagued the place.

To be clear, I truly admire the many committed and competent government professionals I worked with – but most are abused by management indifference. If there is no reward for solid performance or consequence to incompetent or indifferent performance, why bother? For a place that claimed to care about work and workers, the Labor Department was truly pitiful – and even though I started an innovative new agency, I did far too little to trim the dead branches and give the new ones room to grow.

What public policies contribute to better business results and better adjustment to the sometimes wrenching dislocations caused by global economic integration? The key to both turns out to be to make firing people as easy as hiring them and to make changing jobs economically painless. Imagine a law with three provisions:

All employment must be “at will”, meaning that an employer has the right to terminate any employee at any time for any reason. It’s a no-fault firing law — employers can fire anyone they wish. No law, employment agreement, union contract, or civil service rule may provide otherwise. Academic or government tenure is not just dead – it’s illegal. When it comes to employment, employers get all the rights.

With these rights however, come a significant economic responsibility. An employer can fire at will, but he or she must make income continuation payments to a terminated employee and cover their health care insurance until the employee starts a new job or for three months plus a month for each year of service up to a maximum of six months. Labor or employment agreements or state laws could increase the income continuation period — this would be the minimum. Employers would make health care coverage (COBRA) payments through the employment transition period. Income continuation would be adjusted in special cases.

A government income continuation payment would provide an extension to the income continuation period, perhaps at 80% pay, for those employees over age 50 who need it — or for those workers in industries targeted for trade adjustment assistance. Older workers and those employed in industries that are declining rapidly often take longer to find new jobs. Many must retrain and/or relocate and direct payments of this sort are efficient to administer. Workers under age 25 would have their income continued for half as long. There are enough barriers to hiring young people; most can relocate, retrain, and get rehired quickly. And this ain’t France.

Employers can require a 60 day probationary period during which they may terminate an employee without an income continuation obligation (you need a wacko exemption to catch people who should not have been hired in the first place).

No games. Anti-discrimination remains the law. An employee who quits or is fired for criminal behavior forfeits their right to income continuation. An employer who demotes or relocates an employee more than ten miles would be deemed to have constructively terminated the person and would be liable for paying income continuation.

Under this no-fault termination law, we no longer care whether a person was laid off because they were no longer needed or dismissed for mediocre performance. Under the no-fault system, it is “time to go – here’s your dough” and everyone parts friends.

We eliminate a ton of employment litigation, since we no longer care why an employer fires you, so long as they keep paying you for the required length of time. In the words of Oliver Wendell Holmes, you can be fired for “a good reason, a bad reason, or no reason at all”. An employer might have legitimate reasons (lousy performance, declining demand for your skills) or despicable ones (the cut of your jib, the mustard on your shirt — but not race, creed, color, orientation, etc.).

Remember, all firing costs are actually hiring costs, so employers will either learn to hire more carefully and to terminate more selectively or lose ground to those who do. Donald Trump style bosses would quickly go broke — which strikes me as a fine thing. The cost of income continuation would be offset in some measure by productivity increases that would result from the greater flexibility granted employers. For conservatism however, assume that labor costs go up. The law would destroy jobs or depress wages because hiring is like anything else: the more it costs, the less it happens.

Priced correctly however, the advantages of no-fault terminations would more than make up for their costs.

Protectionist political pressures would cool as people realized that involuntary job changes were unavoidable, occasionally disruptive but not financially catastrophic, and often surprisingly useful. Unchecked, these political pressures have the potential to choke world trade and destroy a great deal more wealth than a no-fault income continuation plan ever would.

Productivity would increase as some employers took advantage of greater flexibility and an entire unproductive industry based around employment right and litigation would be vastly reduced.

Civil service productivity could be systematically improved, increasing the ability of government to attract talented people as they improved the pay and productivity of public employees

A range of reforms in school and government agencies would immediately become feasible. Government would be able to target trade adjustment assistance not to companies that failed to adapt to markets but to employees who need time to locate new opportunities.

Economic dislocation is a feature, not a bug. It is part and parcel of the profound changes sweeping the globe — changes that have the potential to bring a better life to people all over the world. But these changes are not good news for all people at all times — they create in many, many people real fears and economic insecurities that can manifest themselves in political decisions that do little to reduce disruption but can do a great deal of damage to world economic growth.

After World War I, a new technology wiped out more jobs than any other in American history. Those affected were devastated by widespread job loss and some scholars assert that this change contributed to one of the largest labor migrations in US history. Do you recall what invention had such a massive impact?

The answer is that until the 1920s, most middle class households in America had domestic servants, or washerwomen. Then the washing machine (helped later by the vacuum cleaner) eliminated hundreds of thousands of these jobs, which were held almost entirely by African American and immigrant women.

Few today wish those jobs to return – but at the time, plenty were terrified to see them go. Nearly a century later, helping people change jobs remains one of our most pressing unsolved domestic problems.