Shaving the Economic Truth

There go those vaunted productivity gains. People who don’t punch a clock are working at home and on weekends to keep up, and none of that time is recorded as worked by the Bureau of Labor Statistics. Now the other shoe has dropped.

According to a straight news report in the New York Times (Altering of Worker Time Cards Spurs Growing Number of Suits), a rising tide of lawsuits against such mega-employers as Wal-Mart concern an apparently common practice called time shaving. This is what managers do to keep on budget. They go into their little computer programs and cut peoples’ hours, after the people have punched the clock. The companies claim these cases are the exception.

I bring this up because Alan Greenspan, who should know better and probably does, has repeatedly claimed that it is just these productivity gains that have been the major cause for the slowness of the rebound in hiring. If the courts determine that shaving is as widespread as it now appears, it’ll punch a hole in the whole notion of productivity gains.

Productivity is measured by asking businesses how many hours workers work and they respond voluntarily. In the past, the “experts” have been able to claim that these reported hours works (productivity is output divided by hours worked, Technical note), were backed up, in many cases, by clocked hours…that is records.

The very records that are now the focus of lawsuits all across the country as workers are going to court over being rooked out of they pay the deserve by management’s practice of shaving time.

Ironically, McDonald’s, where workers apparently deserve a break, too, had long ago solved this problem. Unlike Wal-Mart and many other large employers, the home of the Big Mac uses software/clocks that print out a hard copy of the hours worked each day by workers. And the workers are given this receipt by management, so any discrepancy would and does show up right there…and can be corrected.

Corrected because it is viewed as a mistake, not as a way to cheat workers and make the bottom line look better for companies. And cheating the workers, making this productivity gain fantasy look real, means that the number that is so crucial for the economic planners who rely on it is off.

It also means that investors who look at this number as a key to the efficiency and success of management of these public companies are being misled, badly. Add the shaved percent of time, which is labor cost, back into the P&L of these companies and you see a very different picture emerge. One in which, if the lawsuits now beginning grow and turn into class action suits, could result in large judgments against some of these companies. Such a liability would hurt their bottom lines, their earnings. That throws off the price-to-earnings ratio…and will negatively impact their stock price…

The New York Times article was straight reportage and, typically and disappointingly, failed to connect these dots. But the paper and reporter Steven Greenhouse deserve kudos for the story.

Without knowing it, perhaps, Greenhouse has broken the most important business story of the year. Sure, it will be off the radar in another day. In fact it already is. But when the judgments start coming down and the companies have to pay labor costs and huge one-time charges and their stocks crack up, maybe folks will remember it again.

If the folks have read this column and figured it into their investment strategy, they may even have avoided getting crushed in the Market, when, suddenly, the myth of productivity gains vaporizes.

On a non-investment note: I don’t know if it is illegal to shave time. I don’t know if it is an SEC violation to report such shaved hours and distort your profit picture as a result. I do know it is immoral not to pay a worker what you agreed to pay. And I know that managing a company that way is unethical and morally wrong. ¶ 3:45 PM