Letter from Washington: Let’s Hear It for Bad Service

by Eli Lehrer on November 30, 2010

photo by Thomas Hawk/Flickr, used under a Creative Commons license

The data are coming in and, after a one-quarter lull, worker productivity seems to be ratcheting upward again.  Normally, this would be good news.  Increasing overall workforce productivity is incredibly important. In the long term, it’s only way to raise the overall standard of living. If productivity does not increase, any gain to one person’s standard of living will result in a loss somewhere else.

In the current economy, however, good productivity news may be bad news for those hoping for a rapid recovery. American workers are, already, by most measures, already the most productive in the world. At the end of the fourth quarter of 2010, furthermore, most big companies will show healthy profit margins and a few superstars—Apple and Google—will have ungodly amounts of cash in the bank. But unemployment remains stubbornly high because companies have realized these profits with only modest new hiring. If productivity sags, as it did during the second quarter of this past year, that’s good news because it will encourage companies to spend some of this cash hiring. More hiring will spur more demand which, in turn, will spur more hiring.


So how does this relate to insurance and finance? Well, when the OECD, the international organization for larger economies, compiles data, it typically finds that American workers outdistance the rest of the world in all but one category: Finance, Insurance, and Real Estate.

This is, in my judgment a fact about the American economy that we don’t pay much attention to: our manufacturing, service (other than finance), and, yes, even government workers produce more than those almost anywhere else in the world. (Places like France and Northern Italy where hours are limited and unskilled workers are kept out of the labor force altogether do have higher hourly productivity but this is mostly a statistical artifact.)

Finance is different and, best as I can tell, nobody has taken a serious look at as to why. Given that Americans work longer hours and have more capital behind them than workers in other countries, it seems hugely unlikely that this somehow results from laziness, lack of skill, or relative economy-wide over-regulation:

Here are three pieces of speculation:

  1. It may simply be the way we sell real estate: It’s relatively easy to become a real estate agent—only about eight weeks of classes—and the best ones can make enormous amounts of money. But this low barrier to entry means that, even during the real estate boom, new real estate agents flooded into the market and sales per agent went down. As a result, individual realtor incomes rose only slightly even as home values surged. Since real estate agents are the largest discrete category of financial workers–their trade association is the largest in the country of any type—this may explain a lot. Complicating things even more, the fact that many agents work almost entirely on commission and almost never maintain Monday-Friday 9-5 hours means that plenty of people (semi-retired, parents with kids at home) may claim to have a full-time real estate job but don’t really work as much as they say they do.
  2. American financial work may just be more “consumer facing” than the alternatives, this simply means that there are more lower-level, lower wage jobs in finance: The City of London’s Financial district, is depending on how one counts, either bigger or about the same (financial) size as Wall Street and employs about the same number of people. But, the U.S. has huge network of Main Street stockbrokers with no equivalent in the U.K. This means that many fewer low-end financial services jobs (receptionist, etc) exist in the UK than in the U.S.. This cuts average productivity.
  3. Insurance regulation is different: The U.S., unique in the developed world, regulates insurance only on the sub-national level. All other OECD countries I can find data about either have unitary national insurance regulation (France, Japan) or, if they have a federal system (Canada, Germany) give insurers the option of federal regulation. In the U.S., all insurance is regulated at the state level. As a result, agents can’t always work across state lines, consumer insurance sales are mostly done by smaller, locally owned businesses, and companies that operate mostly or entirely in one state often have significant market shares. This just can’t be very efficient and may drag down worker productivity.


I’m still betting on a stronger-than-most people expect (although, quite possibly, high unemployment) recovery in 2011. Another data point: McDonald’s service or lackthereof.

As I’ve argued before, it’s possible to tell the state of the local economy in many places by monitoring the quality of service at McDonald’s. Bad service means a good economy and good service, a bad economy.

Here’s the logic: McDonald’s trains from scratch and rarely pays counter service people much more than minimum wage. It has so many restaurants, furthermore, that it’s almost always hiring somewhere in any given metropolitan area.  In a bad economy, skilled workers looking to take any job will find work at McDonald’s. (Since the food is cheap, McDonald’s tends to do better during recessions.)

In a good economy, on the other hand, these same workers will quickly leave and McDonald’s will be stuck hiring high school kids, others with little work experience, recent immigrants with very limited English language skills and others who may have a difficult time providing decent service.

Anyway, I got awful, incompetent service at very nicely built Baltimore-area McDonald’s the other day. I was a little upset at having to repeat my order three times and still seeing them get it wrong. . .but, hey, it made me think that my stock portfolio is going to have another good year in 2011.

Until next week,

Eli Lehrer, National Director and Hamburger Eater

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