Labor Cost

Labor Cost-Cutting in the 1990s

From U.S. Department of State

Labor Cost-Cutting in the 1990s

Exacerbating pay gaps between people of different sexes, race, or ethnic backgrounds was the general tension created in the 1980s and 1990s by cost-cutting measures at many companies. Sizable wage increases were no longer considered a given; in fact, workers and their unions at some large, struggling firms felt they had to make wage concessions -- limited increases or even pay cuts -- in hopes of increasing their job security or even saving their employers. Two-tier wage scales, with new workers getting lower pay than older ones for the same kind of work, appeared for a while at some airlines and other companies. Increasingly, salaries were no longer set to reward employees equally but rather to attract and retain types of workers who were in short supply, such as computer software experts.

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This helped contribute even more to the widening gap in pay between highly skilled and unskilled workers. No direct measurement of this gap exists, but U.S. Labor Department statistics offer a good indirect gauge. In 1979, median weekly earnings ranged from $215 for workers with less than a secondary school education to $348 for college graduates. In 1998, that range was $337 to $821.

Even as this gap widened, many employers fought increases in the federally imposed minimum wage. They contended that the wage floor actually hurt workers by increasing labor costs and thereby making it harder for small businesses to hire new people. While the minimum wage had increased almost annually in the 1970s, there were few increases during the 1980s and 1990s. As a result, the minimum wage did not keep pace with the cost of living; from 1970 to late 1999, the minimum wage rose 255 percent (from $1.45 per hour to $5.15 per hour), while consumer prices rose 334 percent. Employers also turned increasingly to "pay-for-performance" compensation, basing workers' pay increases on how particular individuals or their units performed rather than providing uniform increases for everyone. One survey in 1999 showed that 51 percent of employers used a pay-for-performance formula, usually to determine wage hikes on top of minimal basic wage increases, for at least some of their workers.

As the skilled-worker shortage continued to mount, employers devoted more time and money to training employees. They also pushed for improvements in education programs in schools to prepare graduates better for modern high-technology workplaces. Regional groups of employers formed to address training needs, working with community and technical colleges to offer courses. The federal government, meanwhile, enacted the Workplace Investment Act in 1998, which consolidated more than 100 training programs involving federal, state, and business entities. It attempted to link training programs to actual employer needs and give employers more say over how the programs are run.

Meanwhile, employers also sought to respond to workers' desires to reduce conflicts between the demands of their jobs and their personal lives. "Flex-time," which gives employees greater control over the exact hours they work, became more prevalent. Advances in communications technology enabled a growing number of workers to "telecommute" -- that is, to work at home at least part of the time, using computers connected to their workplaces. In response to demands from working mothers and others interested in working less than full time, employers introduced such innovations as job-sharing. The government joined the trend, enacting the Family and Medical Leave Act in 1993, which requires employers to grant employees leaves of absence to attend to family emergencies.

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Next Article: The Decline of Union Power

This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.

Taking Offshoring Beyond Labor Cost Savings

Offshoring becomes a powerful tool for business transformation once companies combine labor cost savings with other productivity and revenue-generating levers.

The McKinsey Quarterly, McKinsey & Co.

June 19, 2006

Most global executives know by now that offshoring can deliver more than just labor cost savings. A good offshore strategy should also generate new revenues, increase capital productivity, and manage risk in ways that would be unaffordable in home markets.

But in many sectors, relatively few executives are acting on this knowledge, even though leading companies are showing where the gains can be made. One reason for the lag is that many executives don't fully recognize the potential for generating revenues and cutting costs through offshoring -- or through broader strategies that combine it holistically with other restructuring initiatives.

Take the airline industry. A carrier with $10 billion in annual revenues could save about $100 million a year by offshoring labor-intensive tasks (such as reservations, the administration of loyalty plans, and customer care) to a region with lower labor costs and comparable or even higher-quality talent pools. Today most multinational companies with significant operations in developed nations have analyzed the cost-cutting opportunities that offshoring can provide and understand them well.

Most companies also recognize that, in theory, utilizing this same lower-cost labor can allow them to pursue revenue opportunities that wouldn't be profitable if handled by higher-cost employees. As yet only a few leaders have put theory into practice. An airline company, for instance, might find one such opportunity in recouping revenues lost when travel agents undercharge customers for plane tickets -- either by mistake or to win over preferred clients. Traditionally, carriers could afford to audit only a small sample of their invoices to detect instances of undercharging, but when the task is offshored to lower-cost locations they can review