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Saturday, May 23, 2009

The Decline of Merit Pay in Journalism

David Cay Johnston on the job market for journalists:

Welcome to the Jungle, by David Cay Johnston, CJR: Reporter Dan Browning’s piece on coming newsroom cuts at the St. Paul Pioneer-Press contains a curious detail that perhaps will encourage rigorous thinking in articles covering compensation. “The company said it wants… the elimination of merit pay….” Browning wrote... The term “merit pay” usually means that management rewards superior performance with superior compensation. ...

There is an adage among business owners ... that properly priced labor pays for itself. Workers whose pay equals their economic value-added receive just what they contribute and, in effect, cost the employer nothing. Those who are underpaid, however, damage profits through inefficiency, because when you underpay you attract less efficient workers. On the other end, those ... who are overpaid rob the owners of part of their profits.

So what does it say that Pioneer Press ... wants to stop rewarding superior performance with appropriately superior pay?

In theory, the best workers will go elsewhere. After all, the highest performers will be in demand and others will bid for their talent. The theory of market economics says that ... the quality of the labor ... will diminish, with appropriate damage to ... equity.

But the real world is not an economic textbook... In reality, stopping merit pay may not result in the market punishing the owners, assuming the merit pay was proportional to merit. Just the costs of selling a house, moving household furniture, and the disruption to family works against departure for all but executives, who usually get such costs covered along with a so-called gross up for taxes.

For anyone making the roughly $80,000 all-in average compensation of PiPress journalists, the costs of moving are inhibiting, the reality of family is inhibiting, and the risks of a new job not working out are daunting since, unlike senior executives, their new jobs rarely come with guarantees if things do not work out.

Because of high transaction costs and high risks, some of the best PiPress journalists will stay in place, choosing getting stiffed over attempting to maximize the value of their labor.

But there is another factor at work, one that has hit many millions of other workers for decades and is now beginning to strike newsrooms. It is a trend that hardly anyone but Louis Uchitelle has covered in a sustained way... It is the health of labor markets.

If there are no other reporting, editing, graphic and photography jobs to be had, then PiPress management can eliminate merit pay without regard to the competitive labor market. Competitive markets matter only if they exist. If they are rigged (as with executive pay) or sick (as with journalism, auto making, steel and aluminum, widget making, college teaching, etc.) then the virtuous self-reinforcing benefit of competitive markets is replaced by the viciousness of raw economic power. This picture is not pure black and white, but it is surely a darkening shade of gray.

In journalism right now the labor market is so enfeebled as to barely exist. At least 15,500 journalism jobs were lost last year alone, according to Erica Smith of the St. Louis Post-Dispatch. And the pace of job losses is quickening, with nearly 10,000 lost in the first four and a half months of 2009.

Fellow journalists, welcome to the take-it-or-leave job market, the result of decades of economic policies reported on with little-to-no skepticism and mostly timid questioning, and one heretofore populated mostly by workers outside reporters’ social circles and class. Television news, especially cable television, has a major blame here for relying heavily on a narrow range of mostly white, male, affluent sources with economic ties to those who benefited from these economic policies, especially the talking heads supplied by the Big 12 ideological marketing organizations of the business-right, including the Heritage Foundation, the Competitive Enterprise Institute and their like.

Welcome to globalization rules written not by all of the competing economic forces, but primarily by the financier class those donations are vital to both parties on Capitol Hill and whoever is in the White House. Welcome to a world that would have Adam Smith tearing his hair out. Welcome to a world where classic competitive market theory is described as a liberal idea, making it therefore suspect to many.

Assuming the accuracy of Browning’s article, a major publisher has decided that it can ignore market economics without being punished by the market. Dean Singleton ... may well be right here as a matter of his investment interests, that pay-for-performance is no longer necessary due to market failure, and so giving only average pay will enhance his wealth instead of ravage it.

Instead of looking for hopeful signs in each day’s stock market results, a modern version of reading tea leaves and animal entrails, perhaps some journalists will join Uchitelle in asking the fundamental questions about the labor market, not just for journalists but for all workers outside the executive suite. Who infected it? What has been the course of the disease? What remedies exist? What are the relative costs and benefits of applying different treatments?

And along with that it would be good to see a great deal of hard reporting on the consequences of letting an economic cancer metastasize.

We come to the same conclusion, I think, but I don't fully agree with this. With perfect monitoring, and a pool of unemployed workers who are, essentially, perfect substitutes for existing workers, and a few other assumptions needed to ensure perfectly competitive markets, merit pay is not needed to motivate workers to put out more effort and raise profits. For example,  in Performance Pay and Wage Inequality (open link to earlier version), Thomas Lemieux, W. Bentley MacLeod, and Daniel Parent (QJE February 2009) say:

In the standard competitive model, firms and the rest of the labor market observe the marginal product of workers, while competition ensures that the wage is equal to a worker’s marginal product. In this setting, modes of payment (fixed wages, performance pay, etc.) have no empirical content because no matter how workers are paid, they are paid for their marginal product. In practice, firms appear to find the problem of setting wages equal to marginal products difficult if not daunting.

The existence of merit pay implies non-competitive features in these markets. So I would quarrel a bit with the assertion that "pay-for-performance is no longer necessary due to market failure" since it is market failure that motivates merit pay to begin with. The decline in merit pay may mean that the markets are becoming more, not less competitive, at least on the supply side of the market.

There are many reasons to put performance pay systems into play, performance pay can be used to motivate workers, to sort workers when they have unobservable characteristics, and to retain the best workers.

I want to focus on worker retention. When the workforce is unstable, firms tend to use merit and other performance pay schemes both as a retention strategy and as a means of motivating workers (see the QJE article linked above). But these pay systems are also inherently unequal, and that internal inequity (perceived or real) can cause unhappiness and poor performance among the workers who think they deserve more (note that merit pay rather than piece-work pay tends to be used as a reward for performance when output is harder to monitor, so the rewards will be somewhat subjective and hence subject to dispute).

When the workforce is more stable, firms tend to rely upon deferred compensation schemes rather than merit or other performance pay to motivate performance (again, see the QJE article). Thus, with a stable workforce, you tend to see promotions, pension plans, and other rewards used rather than direct performance pay schemes. Though I can't cite evidence showing this (or contradicting it), it seems as though this could also help to obscure inequality among workers and reduce the associated internal dissatisfaction.

For the reasons given in the article above, the workforce has become more stable and, consistent with theoretical predictions, this is eroding merit pay in this industry. If theory is correct, then what we ought to see is the merit pay schemes being replaced with promises of future compensation or promotion as a means of providing the incentives needed to motivate workers and overcome the problem of imperfect monitoring (though the motivation problem is partly resolved by the existence of so many talented unemployed workers ready to take their place).

So I don't see the abandonment of merit pay as necessarily implying that these markets are "sick" or that it indicates a higher degree of market failure than before. What appears to be happening is that the market power that is present in these markets is becoming more unequal. The number of firms offering jobs is relatively small and declining, while the number of people willing to work at those jobs is going up (relative to demand at least). Much like many other markets, the consequence is that workers - due the large supply of unemployed workers and to the factors cited above like the costs of moving, disruption to the family such as changing schools, and factors not cited like the fear of losing health insurance - are, to some degree anyway, at the mercy of their employers. They are not free to pack up and leave for another opportunity even if they are lucky enough to find one.

The solution to this problem is to restore balance in these markets, and one way to do that is to increase the number of job suppliers so that the markets are competitive on both sides (and to reduce the transactions costs of changing jobs through means such as health insurance that follows workers from job to job). Unfortunately, that is not something we can do easily - we cannot just snap our fingers and have new journalism jobs suddenly appear - so we must pursue other means such as allowing workers to form unions or enter into other relationships that concentrate and balance power.

So, like the article, I also hope that journalists start asking the questions above, not just about their own markets, but about all markets:

Who infected it? What has been the course of the disease? What remedies exist? What are the relative costs and benefits of applying different treatments?

And as they begin to better understand the role of labor organizations in balancing these markets so that workers - including journalists - are not disadvantaged at the bargaining table, I also hope that their coverage of these issues will reflect that heightened awareness of how these markets work and what it will take to give workers an equal voice in negotiations.

    Posted by on Saturday, May 23, 2009 at 11:27 AM in Economics, Market Failure, Press, Unemployment | Permalink  TrackBack (0)  Comments (28)


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