Cost of the scenery Businesses can’t continue to bet the region’s beauty will attract workers despite bargain-basement wages

We’ve all known for decades that our wages out here generally seem to be about 20 percent less than national averages. Yet our actual cost of living is typically at the national average or even above.

Once you factor out the cost of local housing, just about everything else we buy operates on national prices, and the difference is a very real "price of the West."

By Al Jones
for Headwaters News

http://www.headwatersnews.org/perspective.html

Looking at skilled manufacturing jobs in a trade magazine’s comparison, I found Montanans were paid about half what their Californian counterparts earned, and California’s median wage has long been about the same as a Montana household with two workers and two or three jobs. Yet having met many Californians, I haven’t found them to be more productive, skilled or knowledgeable to that degree.
Yet the work force, at least here, is unusually literate, numerate, and considerably better educated than in many states, although this mostly goes unrewarded in the workplace.

We do congratulate ourselves on a workforce that often sticks to a 35-40 hour week to leave time for outdoor recreation, invests little personal time in continuing education or developing new work skills, and is too often complacent about mediocre job situations.

I work with hundreds of employers and employees, and this has become a common thread, while the ones espousing our hard-working, flexible workers are often referring to the dwindling pool from farms and ranches, or to fresh graduates.

Yet the work force, at least here, is unusually literate, numerate, and considerably better educated than in many states, although this mostly goes unrewarded in the workplace – despite the claims of the education establishment.

As a fourth-generation manager, I tend to blame management more than workers, and having worked with perhaps 2,000 workers over the past two decades, here are some reasons why.

Managers are 20 percent of the workforce and their compensation has grown five-fold over the past 30 years, while the other 80 percent of workers have seen declining real compensation. Relative negotiating power, then, seems to be more responsible for wage differences than productivity, performance or scarcity.

Too many managers out here are still essentially untrained in virtually any aspect of business or management, so they’re a lot less effective, consistent, productive or aware than they should be. An untrained manager, desperate to keep others from realizing how over his head he is, tries to hire people who won’t notice or question his incompetence.

His or her counterproductive actions drain initiative, innovation and energy from a workplace, resulting in the typical argument that "there just isn’t the money to pay people well in this business at this time."

If labor is relatively cheap, it conceals inefficient management, while expensive labor forces managers to do far more of everything to make the business work. That’s the hidden side to productivity gains by high-cost workforces and the hidden side to outsourcing.

One study found it took five Brazilian steelworkers to equal the output of one U.S. steelworker, but because the wages were so low for the Brazilians, five of them cost less than one in the U.S. It’s an arithmetic game that actually rewards poor management.

There are many examples in any of our communities of well-run businesses that are the exception to the "rule" of paying low wages.

I’ve worked with more than 1,000 of them, and I have lost faith in the "tough times" argument, because no matter how good the local or regional economy gets, the same mantra keeps wages suppressed – it’s a reflection of managerial competence, not labor demand or productivity.

An odd factor is, managers of many businesses I’ve seen believe inflation ended sometime in the Reagan years, rather than recognize that it rolled back to 1 percent to 4 percent annually. Those managers, unless they deal with unions that regularly ask for cost-of-living raises, have adjusted their wages little.

So over the past 20 years, that small, compounding inflation rate itself accounts for a scary loss of purchasing power in what might have been a livable or good wage in the 1980s.

Look on the Internet for a Consumer Price Index calculator for wages and you’ll discover that your serious adult wage may well be little different from your college or entry-level wage of 20 years ago, in real dollars. It’s tempting to say that Westerners don’t understand inflation, and many of our ag commodity prices would support that belief, but we all buy cars, houses, insurance and health care, and those costs should be tipping us off to a long-term rise in the cost of living.

One of the strangest thing about working in state government has been annual or bi-annual salary adjustments in recognition of the impact of inflation, while my most recent private sector time was in a company that didn’t realize that 10-year-old wages and prices were no longer accurate.

If managers benchmarked wages and prices against industry norms, strived for continuous improvement, allowed training for everybody, and instituted quality-management practices, they would go a vast distance in resolving this gap. There are plenty of Western firms that have shown what a difference they make.

Nearly everybody under-prices much of what they sell, so coupled with poor productivity, there isn’t the profit margin there should be to pay fair compensation. Business owners who work 100 hours to take home 20 hours’ wages are far more the norm here than the exception. It’s a major reason why half our businesses barely sustain the owner and have no employees (other than free, drafted family members).

The perceived lack of competition allows almost no investment in marketing, which is the key to profitability and growth, if done right, so that sabotages everybody’s potential compensation.

Incredibly inefficient selling practices destroy profit margins, growth and predictable sales on which to base compensation. Hiring anyone, let alone giving them a raise or health insurance, is essentially a gamble on whether the sales and profits to pay them will be there for years to come.

When sales and profits are unreliable, unexamined, and often unrepeatable transactions, paying people as little as possible becomes a survival skill for business owners and managers.

Finally, everyone needs much better information about what the going rates really are for their work and their skills. The employees are guessing when they negotiate, and combined with low perceived negotiating power, are at a pretty deadly disadvantage.

Many employers really don’t know their own finances or sales well (I work with them on this on a daily basis, and it’s much fuzzier than anyone would expect), let alone what competitors here and beyond are paying for any given skill set, attitude, potential, energy level, diligence or other employee attribute.

This makes for nearly random and indefensible ranges of compensation within the same company, which is the real reason why most keep compensation as the greatest secret in the company; everyone would be appalled if they knew the truth.

Nancy Kelly’s lively contrarian book, "The Divine Right of Capital," suggests that since people add virtually all of the ongoing value to a business (investors add a one-time infusion that, in effect, is a high-cost loan), we should publish compensation data like we do stock prices. That would balance pay scales with reality, rather than leaving human capital in the dark.

Much of this information is already collected by state and federal agencies, but it’s often aggregated for other purposes, so that it loses much of its informative power.

An example of how powerful it can be is look at the Davis-Bacon Act’s current measures of what specific construction jobs pay in your region. If this was published in the local newspaper like the stock index, it would inform every carpenter, electrical journeyman and concrete laborer what his or her wages should be.

What if an engineer, a retail cashier, a route salesman, a nonprofit executive director, or an LPN, as well as their employers, could readily check the quarterly wage rates online or in the paper, so the negotiation focused on that employee’s skills and the employer’s needs?

In the meantime, any manager can take fairly easy and decidedly cheap steps to improve his or her ability to pay workers more:

* Improving marketing to reduce selling costs and increase margins.

* Pricing accurately, serving fewer unprofitable customers, applying the Toyota Lean Production Model, applying Deming quality management approaches.

* Using open-book accounting to drive down hidden costs.

* Using internal rate of return/economic value added instead of return on investment or "bottom-line" measures of success.

* Dominating market niches instead of the usual messy client mix.

* Really looking at operating costs, or using activity-based costing.

* Cutting turnover with career paths.

* Training everybody 40-80 hours a year.

* Deterring pilferage and theft (which can equal most firm’s net profit).

There are many ways to substantially improve and sustain operating margins and net profits, and they don’t cost much at all to implement if a manager just does some reading and thinking.

Those managers in the West who continue to believe they don’t actually compete in the national labor markets and so can pay half or less of the national rates are already experiencing a much tighter labor market for nearly all skilled and competent workers.

Recruiting regionally and nationally continues to build steam. Relying on skilled workers to move here for the amenities, but who are increasingly unable to afford the nationally indexed amenities such as cars, health care, insurance and tuition is a doomed strategy – even if one just considers workforce population dynamics, as the Baby Boomers retire (they start hitting 60 in two years) and the much smaller Generation X cohort becomes the bulk of the workforce.

In the West and Midwest, where we’ve been losing 40 percent-plus of Generation X to the coasts for 20 years now, the existing skilled labor shortages are just going to get a whole lot worse for companies that don’t match or beat the national wage rates.

Ask the folks in Napa Valley, Sun Valley, Aspen and Vail, or a National Park Service employee, how the scenery discount on wages has been working out for their employee retention and attraction.

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Al Jones is a second-generation Montanan. He has been a business owner, sales manager, commission salesman, union laborer, nonprofit executive director and an employee of state government, providing marketing and financial technical assistance to more than 1,300 businesses ranging from Fortune 500 to start-ups.

The above are his personal opinions, except for the wise ones; those he got from extensive reading and smarter people’s observations.