A New Report Says We Should Stop Treating Our Employees Like They’re Paperclips

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As Nick Hanauer wrote in the American Prospect, the American economy today is home to two types of businesses: “those that pay their workers a living wage—the real economy—and those that don’t—the parasite economy.” Put another way, there are employers who invest in their employees, and there are employers who drain their employees of their resources; the two big pairs of examples that Hanauer uses in the article are McDonald’s (parasite economy) and In-N-Out Burger (real economy) and Wal-Mart (parasite economy) and Costco (real economy).

Parasite economy employers often write food stamps and other government assistance programs into their business model; the government must step in to ensure that low-wage employees can survive on what their employers pay. What eventually happens is that real economy employers wind up subsidizing parasite economy employers. So as a nation, we want to encourage real-economy employers and discourage parasite-economy employers.

A terrific new report from the Center for American Progress titled “Workers or Waste?” offers a quick and easy way to reward honorable real-economy employers for their investments in human capital.  We want businesses to train and educate their employees; everyone understands almost instinctually that trained employees earn more, work more efficiently, stay on the job longer, and have better prospects when they move on. A smarter, more employable workforce is not just great for employers, it’s great for the economy. But we currently disincentivize that investment. As the authors explain:

…A $10 million investment in worker training shows up in a firm’s financial statement—not on its own but lumped into selling, general, and administrative expenses, or SG&A, a measure that includes items such as company lunches and paper clips. Companies’ expenditures on worker training and skills show up not as a valuable investment similar to R&D but as an increase in general overhead, a measure that managers have shown a proclivity for cutting and whose reduction is often cheered by investors. This treatment of human capital ignores the findings of numerous studies: Investments in human capital enhance productivity and are more valuable to a firm than general overhead expenses.

So what’s the solution? The authors recommend…

…requiring companies to distinguish investments in training from general overhead by reporting those investments separately. Requiring firms to disclose their investments in human capital, as they do for R&D, has the potential to pay off for investors, firms, and workers. It would allow firms to demonstrate to investors that they are making productivity-enhancing investments in their workers and would supply investors with material information upon which to base investment decisions. Furthermore, to the extent that disclosure would lead firms to increase human capital investment, it should help raise workers’ wages and benefit the economy overall.

As I said before, everyone understands that employers who invest in their employees are quality employers. And everyone understands that quality employers are generally more profitable and more aligned with the idea of long-term growth. If investors could clearly see which businesses are quality employers and which businesses rely on sheer churn of unqualified staff to get things done, those investors would be better informed about a company’s long-term vision.

This is an elegant solution—one that doesn’t create a whole new government office or a complex series of laws. It simply asks businesses to report their expenditures in a slightly different, more intelligent way. And for the investors, this makes a lot of sense: suppose you had to choose between working at Costco or working at Wal-Mart. Which would you choose? If you’re being honest with yourself, you’d obviously pick the high-quality employer, right? You know that the high-quality employer is going to pay you better, train you better, and plan for your long-term relationship with the company. So why, then, wouldn’t you invest that way?

Paul Constant

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