Barrett’s Briefing: Employment—Past And Future
by Richard Barrett
The great thing about this this blog is that I have the luxury and pleasure of taking a longer view in one of the most turbulent economic times since World War II over fifty years ago, as I’ll be doing over the next few weeks.
Globally, we are seeing seismic shifts in trade flows, financial relationships, business fundamentals, and the balances between people, governments, and business. In many ways we are corks bobbing about in these economic tidal waves.
However, we are corks with intelligence and capability. While we cannot change the tidal waves, we can and should understand them in order to improve our own lives and the lives or our co-workers and friends.
A long view can provide understanding and perhaps some enjoyment in the understanding. But it is also valuable to connect that long view back to the here and now, to address the question “What do I do about it?”
In this article I address the fundamental shifts occurring in employment models in the United States, tracing the roots of the “lifetime” employment model that emerged in the aftermath of World War II. That model has crumbled and the new models are only now appearing.
Tying this long-term trend back to today, we look at two companies pioneering new employment models.
The Old Model—Lifetime Guarantees
Since World War II large US companies offered an amazing, lifetime employment agreement to their workers. This lifetime agreement had three planks:
- Lifetime employment at the same company
- Lifetime health care
- Lifetime retirement
Following World War II, the United States represented only about 5% of the world’s population, but controlled over 95% of the world’s economic activity. The economic infrastructures of Europe, Russia, and Japan had been destroyed. These countries had also lost almost an entire generation of young men, further crippling their economic activity and recovery.
American companies competed only with each other, and completely dominated the global economic landscape. Several factors—tax structures, unions, and a very limited government—led companies to take over the responsibility for health care and worker retirement planning. Since American companies competed primarily with each other only, they could offer the “lifetime employment” agreement mentioned above.
Today the world has changed. The United States still represents about 5% of the world’s population, but controls only about 25% of the global GDP. American companies compete with the
- EU, where governments have taken over the responsibility for health care and retirement, and
- emerging countries, where no one takes responsibility for the workers’ health care and retirement.
American companies can simply no longer afford to offer the three benefits of lifetime employment – job, health care. Some new models are emerging, but they themselves will change as the global economy continues to shift.
The New Model—Just-in-Time Workers, Do-it-Yourself Benefits
The new employment model is just-in-time, do-it-yourself. Companies now acquire workers just-in-time, shifting their employment burden to independent contractors and outsource service providers. Workers, even the direct employees, are responsible for their own healthcare and retirement planning. Indirect payroll costs for direct employees will climb significantly in the next ten years, so companies will continue to reduce their direct employee base and increase their use of contractors and outsource providers.
Example—Building Contractor Restructures for Cash Flow
A Texas building contractor I’ll call TexHomes provides a good example of a “new model” small business. In this post we will focus on his employment model, saving the business model for later discussion.
TexHomes sharpened the company’s focus on restoring foreclosed houses—traditional single family residences, typically restoring about 50 homes each month.
With the sharpened focus, TexHomes needed fewer subcontractors, primarily painters, carpet layers, and maintenance people. With the steady volume and a smaller number of subcontractors he experimented with direct employees, planning for improved control.
But the costs and paperwork escalated rapidly, and the company lost considerable freedom in other areas (retirement contributions, health plans, vacations, etc.). So the company switched back to a subcontractor model for almost all of its workers, even though it provides them with full-time work. Currently the company has a very tight work team:
- Employees – 3 people. CEO/owner, Business Manager/co-owner, Accountant (CEO’s wife)
- Independent Subcontractors – 12 people. All the trade workers are independent subcontractors.
- Outsourced Services – every other function. The company uses an independent accounting service, an independent HR service, and independent maintenance service for all company equipment.
With only three direct employees, this company qualifies as a small business, thus reducing its regulatory compliance burden. In addition, the company operates from a home office, further reducing its operational expenses. Since the three direct employees are also owners, the company can coordinate employee benefits to maximize total cash flow to the owner/employees.
The company generates over $20 million in annual revenue with a pre-tax profit margin exceeding 35%. While it may be a small business, it generates considerable cash for its owners and workers.
Unlike the construction industry, many businesses do not have a long tradition of independent subcontractors. However, you may want to consider how you can apply some of these lessons to your business.
March 17th, 2009 at 5:31 am
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