Industrial enterprises to drive wage growth

High paying jobs aren’t going to come from the high tech or service sectors, leaving industrial enterprises to drive salaries upward.

By Dan Hebert, PE, senior technical editor

Despite recent blips, the U.S. stock market is near all-time highs, and the country has experienced years of uninterrupted growth. It’s party time again in Silicon Valley as multiple high-tech companies have valuations in the billions, many with nary a profitable quarter. On a wider front, the U.S. unemployment rate is respectable at around 5-6%.

But amid these positive signs, wage growth has been anemic, as explained in this April 2015 Economist blog, titled “Why American wage growth is so lousy,” which related, “Inflation-adjusted wages for typical workers are stagnant. In fact, they have barely grown in the past five years; average hourly earnings rose 2% year-on-year in February of 2015: about the same as in February of 2010.” So where is U.S. wage growth going to come from?

Not from high-tech, as this sector simply isn’t going to provide enough high-paying jobs to make a difference. The hottest buzzword in high-tech and the most important attribute for driving astronomical market valuations is scalability, which just means the possibility for exponential growth in revenues without having to hire many employees.

For example, WhatsApp employed only 55 people when it was acquired by Facebook for $22 billion in 2014. Uber is another darling of the high-tech crowd, with a current market valuation of about $50 billion, and just 3,500 employees as all of their drivers are independent contractors, pending multiple legal challenges seeking to reclassify their status to employees.

Also read: How manufacturing innovation trumps theft 

In a Forbes August 2015 article, “The most valuable employees: Snapchat doubles Facebook,” Liyan Chen wrote about how high tech companies can enjoy multi-billion dollar valuations with very few employees. Snapchat leads the way with a $15 billion valuation and only 330 employees, a valuation-to-headcount ratio of about $48 million per employee.

High-tech companies can rake in billions without hiring many workers.

By contrast, industrial giant GE has a market valuation of about $260 billion and approximately 300,000 employees, for a headcount ratio of $867,000 per employee. Facebook's market cap is comparable to GE at $265 billion, but it only employs 10,955, giving it a $24 million/employee ratio. Siemens is another industrial giant with lots of employees; their market cap of $84 billion is supported by 343,000 employees, about $245,000/employee.

Say what you will about industrial enterprises and their treatment of labor, but none ever created multi-billion dollar enterprises without employing legions of workers. So if high-tech companies can rake in billions without hiring many workers, and in fact are virtually required to follow this strategy if they want a high market cap, they aren’t the answer when it comes to creating a significant number of high-paying jobs. No matter how much they pay their employees, there just won’t be enough of them to make much of a difference.

Perhaps that’s why Silicon Valley, often held up as a model to emulate for the U.S. economy, has a very high poverty rate of 14%. As Joel Kotkin wrote in a January 2014 Forbes article, “How Silicon Valley could destabilize the Democratic Party,” one out of four people in the San Jose area is underemployed, up from 5% a decade ago.

How about the services? According to the U.S. Bureau of Labor Statistics, the service sector employed about 122 million people in June 2015 with average wages and salaries of about $21/hr. On the other hand, the manufacturing sector employed around 12 million in June 2015 with average wages and salaries of about $25/hr, which equates to almost 20% higher wages for manufacturing workers.

So, industry is the only area possessing the two attributes needed to drive wage growth. First, industrial enterprises simply aren’t scalable like high-tech firms, as they actually have to hire people if they want to grow. And, second, they pay much better than the service sector.

So, the next time someone tells you the salvation of the U.S. economy is high-tech or the service sector and, by extension, degenerates the industrial sector in which you work, you can make your point with these salient facts, and be proud to be part of the high-wage area of our economy.

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