September, 2000, Vol. 123, No. 9
Hourly wage rates
Précis from past issues
The June 2000 issue of The Region, published by the Federal Reserve Bank of Minneapolis, suggests that three ideas define the term "new economy": one is the embrace of the high-tech world, especially the Internet and e-commerce. Another is an extinction of the traditional business cycle and transformation of the workplace, and a third is the increasing impact of competitive pressures of expanding global markets. "Old Ideas at Work in the New Economy," one of three essays on the new-paradigm theme, illustrates a few of the ways some businesses—both old and new—are adapting to this dynamic new economy.
In this essay, Fed research officer David E. Runkle makes side-by-side operating comparisons of selected 20th century businesses—Wal-Mart, the retailer, versus Dell, the computer manufacturer; Dell versus Compaq, another computer manufacturer; and Herman Miller versus HON Industries, two office supply manufacturers. The author reveals the key strategies used by those which have achieved marked success in the new economy.
Dell and Wal-Mart. By moving certain tasks, such as sales, to the Internet, Dell cut its expenses significantly, providing it with a pretax operating margin that outshone that of Wal-Mart, sometimes by twice as much. Inventory management reveals the greatest gains. "Dell was always a direct retailer that built to order, rather than built to inventory... . In the years 1993 through 1998, Dell turned over its inventory about 10 times a year," compared with Wal-Mart’s five times per year.
Dell and Compaq. Even within the high-tech sector, there are different degrees to which companies "get" the Internet and what it means for a business. What’s really new here, he writes, is how much productivity has been affected by the manner in which Dell stocks and moves its inventory. "Since Dell was always a made-to-order computer firm, while Compaq sold principally through stores, we would expect, even before 1996, that Dell’s inventory turns would have been much higher than Compaq’s, because Dell was building to ship directly to customers, while Compaq was building for inventory that it would ship to stores." Improved inventory management by both firms brought returns in the ensuing years, however "Compaq’s inventory turns were roughly what Dell’s had been in 1993 through 1995. But Dell blew inventory management off the charts and over that same period the ratio of Dell’s inventory turns to Compaq’s inventory turns was 5:1, up from 2:1 in 1995."
Herman Miller and HON Industries. These two furniture makers provide a case study of the effect of transformations in the workplace and employee incentives on productivity. Herman Miller made the decision to offer incentives to all of its employees "so that everyone, including workers on the shop floor, would get bonuses for improved operating performance and asset management." Pretax operating margins doubled for Herman Miller, as they had for Dell, but what was truly remarkable was the effect on inventory turns. "From 1995 to 1998, HON’s inventory turns remained roughly constant at around 16, but Herman Miller’s climbed from 12 all the way up to 35. These were 35 inventory turns a year for a furniture manufacturer whose principal source of sales was not the Internet. This incredible performance was possible only because the employees at Herman Miller all had the incentive to work for better inventory management."
Technology, of course, played an important role, but the employees "were eager to learn and highly motivated to implement the right kinds of new technology." The net effect of technology, plus changes in management and productivity, in tandem with this particular historical locus "means there’s vast potential for increased specialization and increased growth worldwide."
In Runkle’s judgement, our present period of prosperity surprises economists, causing them to believe "something funny must be going on, or something ‘new’… ." His case studies lead him to acknowledge that, indeed, something is happening, but he does not believe there is much cause for concern. Instead, "the growth the U.S. economy is experiencing is less an aberration from previous rates and more a harbinger of potential growth."
Hourly wage rates
Daniel Aaronson and Eric French, writing in the Chicago Fed Letter of August 2000, a publication of the Federal Reserve Bank of Chicago, question the idea that workers receive a constant wage rate regardless of the amount of hours worked. They believe that the wage may be dictated by the number of hours worked, rather than the other way around.
Why should this be so? "One explanation is that there are fixed costs of employment, such as hiring and training. In many situations, these fixed expenses make part-time workers more expensive to employ per hour at a given wage than full-time workers because the fixed costs must be spread over fewer hours of work."
The authors find evidence to support their thesis that part-time workers earn lower wages. Using three different data sets and allowing for particular specifications, "these estimates imply that cutting hours from 40 hours per week to 20 hours per week lowers wages by approximately 20 [percent] to 40 [percent]."
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