Rubber Factory Owner Discovers One Weird Trick For Higher Profit Margins
For the past 40-odd years, productivity in the United States has skyrocketed. CEO pay has skyrocketed. The cost of college has skyrocketed. And over the last 20 years, rent has skyrocketed. The only thing that really hasn't skyrocketed has been worker pay. We all know this by now. We've been looking at these freaking Economic Policy Institute charts for at least two decades. What a lot of people didn't know, however, was that workers were not actually the only people this was bad for.
Charlie Braun has a rubber factory in Ohio, and for a long time, he had been operating on the same low-wage model as practically every other industry in the United States. You pay people as little as possible, never give them raises and if they leave, they leave — and you hire someone new for the same rate.
But the pandemic, and the PPP loans he got as a result of it, allowed Braun to try out an idea he'd been mulling over for some time — hiring more workers and paying them slightly more fair wages. And wouldn't you know it? It actually led to him making more money.
The early signs appear favorable, if initially bumpy. Custom Rubber Corp.'s head count climbed to 124 in July from 91 at the end of January. Profit margins hovered between 5% and 6% in recent months, roughly double the 3% the company had come to expect in a good year.
Labor costs, including taxes and benefits, now account for about 17% of sales, up from 12% eight years ago. But the extra labor has helped CRC to fill more orders, and sales rose nearly 50% in the first seven months of 2021 versus a year earlier. That allowed better use of equipment and other fixed assets—to a degree that surprised Mr. Braun.
The higher margins are good for him, and employees also benefit through the company's profit-sharing plan. Eligible employees received $355 in the second quarter of this year, the most the company has paid since 2012.
Woah if true. It turns out that paying people more in hopes that they will stay on and continue working for you really cuts back on the amount of time you have to spend retraining people to do those jobs when people quit. It also turns out that when you have enough people to do the work you need to be done, instead of trying to make a barebones staff do the work of a full staff, you are more likely to get things done and more likely to make more money.
Braun was first advised to do this by a friend who happened to be an economics professor, but was afraid that if it didn't work out, he'd be screwed and broke.
Mr. Braun has been thinking about worker pay at least as far back as 2016, said Susan Helper, a friend and Case Western Reserve economics professor. Ms. Helper first visited CRC in the 1990s, advising Mr. Braun's father on supply-chain issues. Last year, Ms. Helper sent Mr. Braun a paper she co-wrote on how high wages and high profits can coexist.
"In Cleveland and, to some extent, the nation, we have settled on this low-wage model," said Ms. Helper in March, shortly before she joined the Biden administration's Council of Economic Advisers. That mind-set ignores less obvious costs, such as the expense of hiring and training new workers and lost revenue from missed orders, she added.
Braun himself is coming to some truly stunning revelations, like the fact that workers want a nice and safe place to work and that if you pay more, you will attract more viable candidates, and if you continue paying people fairly and giving them a nice working environment, they will keep working for you. His Human Resources manager learned that hiring people with 2-3 years experience is better than hiring random temps, even if they are more expensive.
One important thing he notes is the way he, like many employers weaponized the recession to keep wages down.
[Braun] blames himself, and the manufacturing industry, for not raising wages sooner and helping fuel the current labor shortage.
"I milked the recession for all it was worth in terms of suppressing wages and not increasing wages," he said. "In hindsight, I probably leaned on that one or two years longer than I should have."
It really, really does not feel good to read that. I am a deeply cynical person and even I honestly never thought employers at that time were consciously aware that that's what they were doing.
Anyone who was in a low-wage job at that time knows the refrain. "We're all suffering right now, this is all we can afford to pay." Employers pushed the "We're all in this together" teamwork mentality as a way to get employees to rally despite the fact that they were getting screwed financially. And yeah, there was a time when that was sort of true, particularly in retail and particularly for smaller businesses, but the mentality just kind of continued. Once people see how far others can be pushed, they rarely pull back.
It's not all working out perfectly, of course. Employees still are not even making enough to support a family.
The company long paid above the minimum wage—currently $8.80 in Ohio for most employers. Even with the recent raises, base starting pay falls shy of the $26.44 needed to support a family of three in Cuyahoga County, according to the Massachusetts Institute of Technology's Living Wage Calculator, though overtime is plentiful.
Also, older employees are not happy about making only a dollar more than new hires. That's a fair complaint that hopefully will be listened to, but improvement always has to start somewhere. The "I had to do it and it's not fair if you don't" mentality is one that has long been weaponized by people who benefit from things remaining sucky forever.
There's a reason why these kinds of articles have been popping up in places like the Wall Street Journal, and that's because it's not really that hard to see the writing on the wall. Low wages don't exist in a vacuum — we need a significant amount of people to be able to buy things, rent apartments, buy houses, invest in new ideas, and if 44 percent of the country is not making enough to do that, the economy is going to grind to a halt. It's literally just not sustainable and you don't have to be a bleeding heart socialist like me to see where things are headed. In fact, you can be a capitalist a-hole who cares nothing for nobody and see that something's gotta give. Because if you want to make money off of people, they have to be able to buy things from you.
Braun, for his part, is worried that the experiment might not work out, because it wouldn't really be possible to lower wages back down after this. But if a little old ant can move a rubber tree plant, I think Charlie Braun can earn a fair living himself while paying the employees at his rubber plant a fair wage.
Because really — if that's not possible, then what is even the point?
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Robyn Pennacchia is a brilliant, fabulously talented and visually stunning angel of a human being, who shrugged off what she is pretty sure would have been a Tony Award-winning career in musical theater in order to write about stuff on the internet. Follow her on Twitter at @RobynElyse