Creative Class

James Surowiecki notes that:

“[In] 2008, for the first time in sixteen years, the finance and insurance industry shrank. Since 1980, this sector’s share of the economy has grown by almost half. Now, apparently, the worm has turned.”

A couple of months earlier, Eric Janzen predicted that:

As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. The FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s.

The FIRE economy – which stands for finance, insurance, and real estate – is extraordinarily concentrated geographically. FIRE made up a whopping 40 percent of Charlotte, North Carolina’s economy in 2006. But that didn’t make it the most FIRE-dependent economy in the nation. That distinction goes to Des Moines, Iowa. FIRE made up roughly a third of total economic activity in Bridgeport and Hartford, Connecticut; Bloomington, Illinois; and greater New York, as well as resort towns like Naples, Florida; Myrtle Beach, South Carolina; and Ocean City, New Jersey.

But, as of yet, the popping of the FIRE bubble doesn’t appear to be having any substantial effect on regional unemployment. There was no statistical relationship at all between the FIRE share of regional economies and the unemployment, measured as either the Feb. 2009 unemployment rate and as the change in that rate between Feb. 2008 and Feb. 2009, according to number-crunching by my colleague Charlotta Mellander. There was a slight positive correlation between real estate and both the unemployment rate (0.13) and the year-over-year change in unemployment (0.17).

But one aspect of real estate economies – construction – does appear to put regions at substantially greater risk. The correlation was higher between regional share of the construction industry and the unemployment rate (0.18) and even more so for year-over-year change in unemployment (0.23).

Hard to say why, but one reason may be that regions with a large share of finance and insurance jobs are economically more diverse. Or perhaps finance and insurance workers have skills that are more flexible, enabling them to shift jobs relatively more easily than say construction workers or blue-collar workers in general.

One thing is clear: the recession continues to hit hardest at older industrial regions and those with sprawl-driven, construction-heavy economies. Those with large shares of finance and insurance jobs seem to be adjusting relatively well.

It sounds counter-intuitive. But during recessions average wages tend to rise. Unusually, in this recession, in the USA, productivity has also risen – by 3.1 percent during Q4 2008 (a year into the recession).

James Surowiecki in The New Yorker explains

Companies are slashing payrolls: 3.6 million people have lost their jobs since the recession started, with half of those getting laid off in just the past three months. Yet average hourly wages jumped almost four per cent in the past year. It’s harder and harder to find and keep a job, but if you’ve got one you may well be making more than you did twelve months ago…

It’s not because businesses are generous that wages are sticky; it’s because employers are worried. In part, bosses are afraid of what economists call “adverse selection”: if they cut wages, it’s the least productive workers who would be the most likely to stay, while the best workers would start looking elsewhere. (Even in a weak economy, businesses still compete for talent.)

And although Surowiecki doesn’t directly mention it, this recession has the added anxiety for many businesses of talent shortage. Now that it is tougher to bring in foreign talent to the U.S., the need to retain existing productive, creative people may be bigger than ever in some industries. And attracting and retaining the best people would be tough if widespread wage cuts were occurring as this tends to undermine the entire workplace productive process. Surowiecki again:

After the 1990-91 recession, the economist Truman Bewley interviewed managers and labor officials at more than two hundred companies and found that most believed that wage cuts wreck employee morale and eat away at productivity. Whatever money they’d save by cutting wages, bosses assume, would be cancelled out by the decline in effort and the breakdown of trust that wage cuts would create.

Apparently layoffs are less damaging to morale than paycuts. Those laid off leave and take their “misery” with them. Presumably good Human Resource management can help the remaining staff bond together to help the company survive.

That productivity has been on the rise this recession may suggest that Human Resources departments are indeed helping to keep morale high. It also may be that certain layoffs may have targeted those workers who dragged down morale and productivity (it’s easier to lay people off than fire them, legally speaking).

The above story contains U.S. data and examples. Tavia Grant in the Globe and Mail published an article Saturday with anecdotal stories of some Canadian organizations requesting pay cuts, arguing that in this recession things are different.

Based on the above, I’d wonder how “forward thinking” or long-term viable these firms are – is cutting pay a last, final step before bankruptcy? And, I’d stress that I believe there is a big difference between asking or requiring people to reduce their hours or work a four-day week, and asking them to reduce their pay without cutting hours – however, feel free to disagree.

Is your workplace feeling more productive or perhaps “efficient and focused” in recent months? How are wages holding up?

In every single speech I make, I say Toyota, not Google or Apple, is the single best example of the creative company.  Nearly 15 years ago, I wrote a book on this with Martin Kenney. James Surowiecki makes the case ever more succinctly in his latest New Yorker column:

But if Toyota doesn’t look like an innovative
company it’s only because our definition of innovation—cool new
products and technological breakthroughs, by Steve Jobs-like
visionaries—is far too narrow. Toyota’s innovations, by contrast, have
focussed on process rather than on product, on the factory floor rather
than on the showroom. That has made those innovations hard to see. But
it hasn’t made them any less powerful.

At the core of the company’s success is the Toyota Production
System, which took shape in the years after the Second World War, when
Japan was literally rebuilding itself, and capital and equipment were
hard to come by. A Toyota engineer named Taiichi Ohno turned necessity
into virtue, coming up with a system to get as much as possible out of
every part, every machine, and every worker. The principles were
simple, even obvious—do away with waste, have parts arrive precisely
when workers need them, fix problems as soon as they arise. And they
weren’t even entirely new—Ohno himself cited Henry Ford and American
supermarkets as inspirations. But what Toyota has done, better than any
other manufacturing company, is turn principle into practice. In some
cases, it has done so with inventions, like the andon cord, which any worker can pull to stop the assembly line if he notices a problem, or kanban,
a card system that allows workers to signal when new parts are needed.
In other cases, it has done so by reorganizing factory floors and
workspaces in order to allow for a freer and easier flow of parts and
products. Most innovation focusses on what gets made. Toyota reinvented
how things got made, which enabled it to build cars faster and with
less labor than American companies.

But there’s an enigma to the Toyota Production System: although the
system has been widely copied, Toyota has kept its edge over its
competitors. Toyota opens its facilities to tours, and even embarked on
a joint venture with G.M. designed, in part, to help G.M. improve its
own production system. Over the years, more than three thousand books
and articles have analyzed how the company works, and things like andon
systems are now common sights on factory floors. The diffusion of
Toyota’s concepts has had a real effect; the auto industry as a whole
is far more productive than it used to be. So how has Toyota stayed
ahead of the pack?

The answer has a lot to do with another distinctive element of
Toyota’s approach: defining innovation as an incremental process, in
which the goal is not to make huge, sudden leaps but, rather, to make
things better on a daily basis. (The principle is often known by its
Japanese name, kaizen—continuous improvement.) Instead of
trying to throw long touchdown passes, as it were, Toyota moves down
the field by means of short and steady gains. And so it rejects the
idea that innovation is the province of an elect few; instead, it’s
taken to be an everyday task for which everyone is responsible.
According to Matthew E. May, the author of a book about the company
called “The Elegant Solution,” Toyota implements a million new ideas a
year, and most of them come from ordinary workers. (Japanese companies
get a hundred times as many suggestions from their workers as U.S.
companies do.) Most of these ideas are small—making parts on a shelf
easier to reach, say—and not all of them work. But cumulatively, every
day, Toyota knows a little more, and does things a little

They’re also phenomenally difficult to duplicate. In
part, this is because most companies are still organized in a very
top-down manner, and have a hard time handing responsibility to
front-line workers. But it’s also because the fundamental ethos of kaizen—slow
and steady improvement—runs counter to the way that most companies
think about change. Corporations hope that the right concept will turn
things around overnight. This is what you might call the crash-diet
approach: starve yourself for a few days and you’ll be thin for life.
The Toyota approach is more like a regular, sustained diet—less
immediately dramatic but, as everyone knows, much harder to sustain. In
the nineteen-nineties, a McKinsey study of companies that had put
quality-improvement programs in place found that two-thirds abandoned
them as failures. Toyota’s innovative methods may seem mundane, but
their sheer relentlessness defeats many companies. That’s why Toyota
can afford to hide in plain sight: it knows the system is easy to
understand but hard to follow.