Tuesday, January 27, 2009

Reduce salaries reduce taxes but don't cut jobs.

Job losses are becoming Frequency type data nowadays. Hundreds of thousands of jobs are evaporating in corporate America. Small businesses are closing down at an ever accelerating rate. It's like people care about a single death but when it is a massacre it just becomes a number. Job cut is a easy short term solution but a very tough long term problem. Unfortunately Corporate America or the Federal government is yet to appreciate the truth and it is going like a never ending downward spiral.

Let me show how this is bad and how we can manage economic downturn in a better way. 

A single job loss creates multiple problems for the government and the business economy:

Loss of Tax revenue - Income Tax, Sales Tax(spending decreases as people get pink slips)
  1. Social cost - Unemployment benefits from government.
  2. Wastage of Company Learning and Developement Expenses, Low employee morale and productivity.
  3. Less Spending - Means less business: which means more job cuts. Emperical study should show one job loss means X more job losses in future.
  4. Other Financial and social issues - More credit defaults, more criminal activity, more social tensions etc.
Hence it is evident that job losses have a downward spiral effect in the country's economy. Agreed. Then what we can do for sustaining a global economic crisis like this? Here are some of my thoughts:
  1. Government should ban(or at least control) Job cuts by companies and also should reduce any lower cap on salary. The idea is not to cut any jobs but reduce the costs by reduced salaries. This way government can still get taxes(Income and sales Taxes) and need not pay unemployment benefits.
  2. Once people have jobs(although having less salaries) they will continue to spend(although at lesser rate but still more than if they didn't had any income). This will reduce the downward pressure on the sales numbers and make the economy more sustainable.
  3. To stimulate the economy government should reduce tax rates at least on a temporary basis. This way both companies and customers will have more money at hand to spend. This loss of tax revenues can be compensated once the economy becomes strong by charging more taxes.


Venu Madhav Tammali said...

Abhishek , It could be the answer to problems we are facing .

I have few things to ask you

Have you took into account the cons of reducing salaries such as good talent loss to other companies( Any market at Any time will always be happy to get the good talent ) and the effect of retaining the employees on the quarterly earnings and dividends etc.
What if the loss is too huge and to meet your strategy the company is forced to reduce the salaries by large percentage?

What would be the treshold upto which you can reduce the salaries ?

I think the right strategy is a mixture of salary reduction and lay offs .

I look this downturn as a great opportunity to layoff the non performing employees the task which may not be possible if things are going good as a round of layoffs then could send wrong sentiments in the market about the company.

Abhisek said...

I agree to the point that downturn is a good time for laying off people, but that should not create mass layoff in the size we see today(and if the company has so many porks it has a serious HR problem).

In a economic downturn everybody is sufferring and there should be rare cases where companies are going to poach people from other companies by higher salaries(exceptions are there).

Salary can be price discovered and we can always have better models to do that(variable pay model).