More Socially Desirable Firms gain strength from Normalization of Monetary Policy

If the Fed raises interest rates and marginal companies are pushed into struggling for survival, is this a bad thing? Won’t we lose jobs? Won’t wages be hurt? Well, the question is… Are the healthier companies (those that can better survive a higher Fed rate) willing to make employees happier?

Well, we now have a study that supports the view that healthier companies are more likely to have happier employees. And I safely assume for the moment that happier relates to better pay. What did the study find?

“Companies that employees report to be a good place to work have significantly outperformed the S&P 500 over the past six years… Since 2008, the S&P 500 has returned 121%, but the companies that employees rate well have returned 218.5%.” (source WSJ)

These more profitable companies are the ones that would easily survive a normalization process of monetary policy… And the employees are much more satisfied.

Even though the source article from the WSJ offered some explanations for this condition, labor economists have been aware of this condition for a long time. Beatrice Webb and her husband wrote about it over a hundred years ago. Here is a quote from a paper by Bruce Kaufman.

“Apropos labels today are “low road” vs. “high road” employment systems.”

“This duality comes from a combination of technological, institutional and human features. A consequence of assuming heterogeneity in factor inputs and production sets is that firms have different cost curves and, given a uniform market price for the good, different levels of profit. As a useful generalization, some firms are very technologically advanced, have efficient managements, and operate at a larger minimum efficient scale. These firms earn above normal profits and, for human motivational reasons, share some of their rents with workers. On the other end of the same product market are undercapitalized, small-scale, and poorly managed firms with higher cost curves that put them in a constant struggle to stay in business. Here, instead of sharing rents, these firms stay in business by taking it out of workers in the form of wages and conditions below the competitive social cost level. The Webbs characterize the worst of these firms as sweatshops and note, “the bottom of the industrial army…. suffers not from great capitalists but from small masters”.” (Kaufman 2013)

These “high-road” firms are more likely to pay better wages. And the implication is that accommodative policy to keep marginal firms alive has put a drag on wage increases. This is why I say that a properly-timed raise in the Fed rate is efficient for the economy and allows better wages in the medium-term. Recent accommodative monetary policy has kept “low-road” firms in business.

More from Bruce Kaufman on the dual structure between “high-road” and “low-road” firms…

“Institutional factors also encourage a dual structure. The larger and better managed firms often develop internal labor markets (Doeringer and Piore 1971). This term was not invented when the Webbs wrote but they observed that certain large employers in the late 19th century were already using various devices to create a long–term employment relationship on the belief it increases productivity and profit (1897: 661 – 62). Smaller–scale and less efficiently managed firms, on the other hand, gain cost advantage by relying on the external labor market with low wages, high turnover, and bare bones training and conditions. Other institutional factors creating a dual structure are sectional collective bargaining, gendered social norms, and labor laws specific to occupations and industries.” (Kaufman 2010)

In the absence of unions and other institutions boosting labor power, we need to support the profitable firms that are already taking better care of their employees. So if less-profitable & marginal companies struggle under a raise in the Fed rate, there is security in knowing that the surviving firms are more likely to raise wages and make their employees happier. Normalizing monetary policy would help weed out the “low-road” firms.
Kaufman, Bruce E. “Sidney and Beatrice Webb’s Institutional Theory of Labor Markets and Wage Determination.” Industrial Relations: A Journal of Economy and Society 52.3 (2013): 765-791.
Kaufman, Bruce E. “Institutional economics and the minimum wage: broadening the theoretical and policy debate.” Industrial & Labor Relations Review 63.3 (2010): 427-453.