Thursday, October 13, 2005

Pay & Technology

Donald Tsang announced in his policy address yesterday a whole new layer of highly paid Hong Kong government bureaucrats. Hong Kong already has several times as many bureaucrats as it needs to run the city. You would think advances in technology would (just as in the corporate world) allow government to do more with less. Maybe our chief executive hasn't gotten the message; or is this is just another perk for his bureaucratic cronies?

Labor in the time of Marx was a tangible political force, and the icon of labor sweating in the factories inspired many a Communist Party cadre under the leadership of Stalin and Mao. But in an era of clean rooms and microcomputers, sweating is discouraged by air conditioning, and workers might rather enjoy profit-sharing and flex-time than political clout. Worse, factory labor has declined to a minuscule proportion of the workforce – around 10% in the U.S.

Executives, consultants, researchers, and a variety of other knowledge workers are the mainstays of 21st-century business. Gradation of wages up and down the hierarchy is hotly debated, as is the actual contribution to the firm at each level. In fact, the whole issue of hierarchy has been attacked with new vigor.

Peter Drucker predicted that the knowledge economy would engender a corporate structure similar to a symphony (a group of equals under a conductor) or the British civil service in India. The reengineering fad of the late 1980s helped many firms move toward these predictions.

One GM CEO estimated that if a recently hired college graduate entered General Motors in the 1980s at the lowest rung in the hierarchy and spent two years at each successive rung, it would take 123 years to move up to CEO. By shrinking the hierarchy, auto firms were dramatically able to improve productivity, allowing them to meet the Japanese challenge in the 1990s.

As a matter of basic fairness, Plato posited that no one in a community should earn more than five times the wages of the ordinary worker. Drucker has long warned that the growing pay gap between CEOs and workers could threaten the very credibility of leadership. He argued in the mid-1980s that no leader should earn more than 20 times the company’s lowest-paid employee. His reasoning: If the CEO took too large a share of the rewards, it would make a mockery of the contributions of all the other employees in a successful organization. By today's standards, Drucker and Plato sound quaint. CEOs of large corporations in 2001 made 411 times as much as the average factory worker. In the 1990s as rank-and-file wages increased 36%, CEO pay climbed 340%, to US$11 million.

The big unknown today involves knowledge workers demand for leisure. This has been observed, at one time or another, in most high-tech industries, where employees often want to take sabbaticals, change careers, demand flexible work schedules, or require other access to ‘leisure time’ as a part of their employment package. Quite a number of successful technology entrepreneurs have left work for a life of leisure, or at least what they consider to be more meaningful pursuits. As wages rise, individuals will increase the supply of work – but in a complex fashion due to ‘income’ effects. When wages rise, workers can consume more without increasing the amount they work. One of the things they can consume is more leisure, bought by working less. At a high enough wage rate, the income effect overcomes the substitution effect and workers will prefer to spend part of the higher wage on leisure. This causes the supply curve to bend backward

Technology acceleration, by making labor more productive over time, essentially shifts the labor supply curve up and to the right by an amount that accelerates over time, though in practice it is nearly impossible to predict when the curve will slope backward. The resulting change in behavior of the workers may also be difficult to predict.

So what is a knowledge worker's demand for leisure? The answer is more difficult than determining a factory worker's demands. These were likely to be influenced by how tired his muscles had become. Knowledge workers can develop 'writer's block'; may need time off for retraining or creative work; may be so highly paid that their own projects become more valuable than the firm's; and there are a host of other justifications for leisure time that were completely unknown in a tightly structured factory.

Do the same rules apply to Donald Tsang's highly paid cadres? It depends on whether they are just clerks with connections; or if they can supply the creative direction that Hong Kong now lacks.


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