Tuesday, December 18, 2007

Correlation between Wage rates and Profits

Very good article that disproves the connection between high wage rates and the competitiveness of companies...
 
 
"Consider first some surprising facts about the effects of wage rates on the competitiveness of nations. Japan runs a trade surplus with China, even though Japan has higher wages. High-wage, presumably high-cost, countries such as Canada and Germany also run trade surpluses. "
 
"Profits also are affected by brand image and product design and quality, all of which affect how much people are willing to pay for a car. While General Motors whines about its cost disadvantage because of its health care expenditures and high, unionized wage rates, Toyota achieved almost $6,000 per vehicle more in net revenue in 2004, according to pay more for each car because it did not have to offer as many rebates, price concessions and financing discounts to get customers to purchase its vehicles. "
 
"And even forgetting about the revenue part of the picture and focusing only on costs doesn't change the conclusion that labor rates are overrated as a source of competitive advantage or disadvantage, because labor rates are only imperfectly associated with labor costs. In 2004, it took Ford Motor Company on average almost one-third more labor hours to manufacture a car than it did Toyota. So Ford begins with a cost disadvantage even if its rate of pay is the same. "
 
"That's why John Whitney, when he took over a near-bankrupt Pathmark Supermarkets in 1972, actually raised the salaries of store managers. As he told me, the last thing you want during a turnaround is to have your best people heading for the door, worrying about their futures, or not putting forth their best efforts. "

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