When Henry Ford started the Ford Motor Company he initiated many ideas which were revolutionary for the time. One of the most denigrated by other industrialists was his the high level of pay he gave to his workers. It was socialist thinking.
Ford calculated that only a well paid middle class could afford his automobiles over the long run. Other industrialists of the time were paying low wages and keeping the largest possible profits for the stock holders, the capitalists.
Until the ’90’s Japanese companies had a practice of hiring people for life. This hindered their flexibility as the industrial industrial environment changed, e.g. the emergence of China. Japan’s economy stalled.
Today, Japan hires temporary workers when it wants to expand so that it can react quickly if the market contracts. Temporary workers are paid less per hour and receive fewer benefits. On the surface, it is a reasonable plan. So reasonable that it has become a way of doing business over the long term. The strategy keeps cost down and has driven Japanese stock prices up.
With all things, balance is the key. As reported in today’s Wall Street Journal, Japanese stock prices are being hit because the purchasing power of the middle class is eroding sharping. This erosion is due to the practice of hiring such a high number of temporary workers in relationship to permanent workers. I’m sure you see the irony.
What is the lesson for us? Henry Ford was right. People can’t spend what they don’t have. If they’ve tapped out their home equity and their job does not pay well, where will they get the discretionary cash to pay $3.86 for a great big Latte at Starbucks or more importantly at coffee shop you own?
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