How to save jobs: Fix laws making it eas­ier to in­vest in ro­bots than in peo­ple.

The Washington Post Sunday - - BUSINESS - ON LEAD­ER­SHIP BY PE­TER CAPPELLI

The job prospects for blue-col­lar work­ers is one of the hottest top­ics in U.S. pol­i­tics. The cur­rent fas­ci­na­tion with the po­ten­tial of ro­bot­ics has helped re­veal the im­por­tant truth that in­creased pro­duc­tiv­ity has been the big­gest and per­haps the in­ex­orable fac­tor re­duc­ing the num­ber of man­u­fac­tur­ing jobs, and that’s in­creas­ingly true in ser­vice sec­tors, as well. Most ob­servers ex­pect this to con­tinue.

So far, the op­tions for what to do about the loss of good jobs are pretty bad. Changes in trade pol­icy have lots of draw­backs, and even if they could be en­acted, they wouldn’t ad­dress the mas­sive pro­duc­tiv­ity-driven job losses in in­dus­tries like man­u­fac­tur­ing. Re­train­ing work­ers who lose jobs sounds like a good idea if there are lots of good jobs avail­able for which they could be re­trained. But that has not been the case, and it is un­likely to be so in the fore­see­able fu­ture. What can we do to help in­crease the num­ber of good jobs in the United States?

One lim­i­ta­tion of the cur­rent de­bate is that it ig­nores the choices in­di­vid­ual em­ploy­ers make about how to get work done and how to im­prove pro­duc­tiv­ity, which is some­thing em­ploy­ers have to do. But sub­sti­tut­ing ma­chines and soft­ware for peo­ple is not the only way to do that. And it is not nec­es­sar­ily even the most ef­fec­tive way.

Why have busi­nesses been so in­clined to go that di­rec­tion? Be­cause we’ve stacked the deck with pol­icy de­ci­sions that fa­vor buy­ing equip­ment over in­vest­ing in em­ploy­ees and man­age­ment.

A strong case could be made that the most im­por­tant fac­tors driv­ing pro­duc­tiv­ity have had to do with man­age­ment prac­tices. Sci­en­tific man­age­ment and assem­bly line tech­niques cre­ated 20th-cen­tury man­u­fac­tur­ing. The big­gest in­no­va­tions in con­tem­po­rary man­u­fac­tur­ing have not come from tech­nol­ogy but from man­age­ment prac­tices, first associated with qual­ity-im­prove­ment pro­grams and more re­cently with the lean-pro­duc­tion prac­tices cre­ated by Toy­ota in the auto in­dus­try.

As my col­league John Paul MacDuffie and oth­ers have doc­u­mented, while U.S. auto com­pa­nies were try­ing to com­pete by re­plac­ing work­ers with ro­bots, the Ja­panese com­pa­nies beat the pants off them on pro­duc­tiv­ity and qual­ity us­ing bet­ter sys­tems to man­age their em­ploy­ees.

Nor is this unique to man­u­fac­tur­ing. My col­league Mar­shall Fisher demon­strated that the key source of com­pet­i­tive ad­van­tage in re­tail is bet­ter-trained and -man­aged front-line work­ers who can make the last and most im­por­tant step in the sup­ply chain work by keep­ing the shelves stocked.

The im­por­tant thing about these man­age­ment prac­tices is that they cen­ter on work­ers, giv­ing them new skills and roles. Yes, ma­chines are get­ting bet­ter all the time, but they still have lim­i­ta­tions. They are ex­pen­sive, they are less flex­i­ble than work­ers, and even at their best, they are only as good as the peo­ple pro­gram­ming them.

So why aren’t we see­ing more fo­cus on up­grad­ing man­age­ment and em­ployee skills rather than re­plac­ing work­ers with ma­chines?

For-profit busi­nesses, es­pe­cially pub­lic com­pa­nies that have ex­ten­sive re­port­ing re­quire­ments for in­vestors, hate fixed costs — those that can’t be re­duced if busi­ness falls. That’s a rea­son we typ­i­cally hear why CFOs, in par­tic­u­lar, hate adding work­ers: be­cause they rep­re­sent fixed costs.

Ro­bots and tech­nol­ogy are mas­sively big­ger fixed costs than work­ers. We can’t lay off ro­bots or re­duce their hours if busi­ness goes down as we can with em­ploy­ees. You might think that would scare in­vestors and busi­nesses away from that ap­proach. What we can do with ro­bots and tech un­der con­tem­po­rary ac­count­ing rules and can’t do with in­vest­ments in em­ploy­ees or man­age­ment is amor­tize in­vest­ments in ro­bots and de­pre­ci­ate them over time, spread­ing out the costs. There are also a range of spe­cial tax breaks for in­vest­ments in cap­i­tal that aren’t there for man­age­ment and em­ployee spend­ing. Tax laws and ac­count­ing prin­ci­ples do not rec­og­nize train­ing and man­age­ment in­ter­ven­tions as in­vest­ments, even though they surely are by any other def­i­ni­tion.

An­other way in which ac­count­ing stacks the deck against in­vest­ments in hu­man cap­i­tal and man­age­ment sys­tems has to do with how those in­vest­ments are re­ported, or not re­ported. An in­vestor look­ing at any com­pany can tell pretty quickly how much it has in­vested in cap­i­tal im­prove­ments be­cause the fig­ure is right there on the bal­ance sheet along with re­lated in­vest­ments like leased cap­i­tal and even fuzzy as­sets like “good­will.” Those in­vest­ments are seen as a good thing for the busi­ness and are counted as “as­sets” held against “li­a­bil­i­ties.”

But if I wanted to see in­vest­ments in train­ing and in man­age­ment, where would I find those? You can’t.

They are lumped in with “gen­eral and ad­min­is­tra­tive ex­penses,” typ­i­cally de­scribed as “over­head” costs. These are li­a­bil­i­ties on bal­ance sheets, and in­vestors like to see them as low as pos­si­ble. To in­vestors, busi­nesses that spend a lot on train­ing and man­age­ment im­prove­ments can look as if they’re blow­ing money on of­fice fur­ni­ture. So we have the irony that busi­ness is re­warded for in­vest­ments in cap­i­tal that raise pro­duc­tiv­ity by elim­i­nat­ing jobs, but it’s pun­ished for in­vest­ments in peo­ple and man­age­ment that raise pro­duc­tiv­ity and save jobs.

The fed­eral gov­ern­ment has spent bil­lions of dol­lars di­rectly and through agen­cies such as the De­fense Depart­ment to de­velop ro­bots and other man­u­fac­tur­ing tech­nol­ogy that dis­places work­ers. The cen­ters for ad­vanced man­u­fac­tur­ing spread the knowl­edge of how to use them to busi­nesses. There is lit­tle at­ten­tion given to how work­ers might fit into these new sys­tems.

So it’s not sur­pris­ing that busi­nesses fa­vor spend­ing to re­place work­ers with cap­i­tal equip­ment.

These ideas aren’t new, and the beauty of them from a po­lit­i­cal per­spec­tive is that there have not been groups or­ga­nized to op­pose them. Chang­ing the tax code and ac­count­ing prin­ci­ples to un­stack the deck against in­vest­ments in em­ploy­ees is far eas­ier and more likely to suc­ceed than any of the other poli­cies un­der de­bate.

It does re­quire more ef­fort for com­pa­nies to in­vest in em­ploy­ees and change their man­age­ment prac­tices than to buy equip­ment that ven­dors will set up.

But the man­age­ment chal­lenges of in­vest­ing in peo­ple and sys­tems are also its sav­ing grace. Any com­peti­tor can call up a ven­dor and get the lat­est ro­bot, so it can’t be a source of com­pet­i­tive ad­van­tage for long, if at all. In­ter­ven­tions that are chal­leng­ing to pull off like bet­ter man­age­ment of the work­force can be. That makes them work in the long term for busi­ness and their em­ploy­ees. Cappelli is a man­age­ment pro­fes­sor at the University of Penn­syl­va­nia’s Whar­ton School.

FRANCK ROBICHON/EURO­PEAN PRESSPHOTO AGENCY

Tax laws and ac­count­ing rules stack the deck in fa­vor of in­vest­ing in ro­bots and tech­nol­ogy rather than in peo­ple and train­ing.

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