Let's say I own a factory that makes widgets. I employ ten people at ten dollars per hour, and each of them works a forty-hour week. That means I'm paying a total of four thousand dollars per week for labor.
Our quota for the week is ten thousand widgets. This means that to make quota, each employee has to make twenty-five widgets per hour, and I'm paying forty cents per widget (not including raw materials and overhead). If one employee calls in sick, the other nine can work a little bit faster to pick up the slack.
Now let's say that an inventor comes along with a machine that can allow my workers to increase production by a factor of ten. The machine still needs an operator to turn it on and keep an eye on it, but when running, it can produce two hundred and fifty widgets per hour, per operator. And now, we have a problem.
Option 1: Let's say I don't buy the new machine, and keep doing business as usual. My competitors will surely buy the machine, which means that they'll be able to produce more volume at a faster rate. If my factor suffers a setback, such as a snowstorm closing the roads or a flu epidemic causing all my employees to call off at the same time, my company will never be able to catch up, by my rival will. I'll be run out of business. So I can't pick option one.
Option 2: Let's say I buy the machine, and continue having my employees work a forty-hour week. This means that by the end of the week, I will have produced one hundred thousand widgets, overshooting my quota by ninety thousand. Most of those widgets won't get sold, so they'll get thrown out, but because of the increased supply, they'll be a lot cheaper, but not enough to create more demand, so I'll take a loss on sales. Also, I'll be using raw materials at a faster rate, which means I'll take a loss there too. So I can't pick option two.
Option 3: I buy the machine, and lay off nine of my employees. The remaining employee does all the work himself, puts out ten thousand widgets per week, and I'm cutting my labor costs by ninety percent. At first, this sounds like a good deal, except for two problems. First, I'm now completely dependent upon one employee, which means that if he's ever sick or gets a flat tire or something, my entire production will stop. Second, because there are now nine newly unemployed people, that lowers the gross domestic product. If too many people are out of work, it can lead to a chain reaction which will lead back to me. (In other words, those nine people can't buy shoes, which means the shoe-seller has to lay people off, which leads to those people not buying hats, which causes the hat-seller to lay people off, which leads to those people not buying burgers, which causes the burger-sellers to lay people off, which leads to those people not buying widgets.) It would not be wise for me to pick option three.
Option 4: Let's say that instead of laying off any workers, I simply cut their hours. If I have ten employees, and each employee can produce two hundred and fifty widgets per hour using the new equipment, and my quota is ten thousand widgets, then I only need each employee to work four hours per week. (It doesn't matter whether I have them all work at the same time or stagger them.) Everything balances out, and I'm still saving ninety percent on labor. However, since each employee will only be getting a weekly salary of forty dollars, and no one can survive on forty dollars per week, all ten of my employees will seek jobs elsewhere. Once they find a decent-paying job, they won't need to work for me anymore, and may even be forced to quit due to scheduling conflicts with their new employers. With no one willing or able to work for me, I'll have to shut down production. So I can't pick option four.
Option 5: Let's say that I buy the machine, keep all the employees, but instruct them only to produce ten thousand widgets total, while still requiring them to put in a forty hour week. This would solve basically all of my problems, as I would now be paying the exact same number of people as before the exact same amount of money as before to produce the same number of widgets as before in the exact same amount of time as before, the only difference being that I can now get caught up more easily in the case of setbacks. The only down side is that now, I'll have ten people doing four hours of work stretched out over a forty hour week, meaning that each person will spend a total of thirty-six hours each week standing around deliberately wasting time. This isn't a good use of my time or theirs. Option five is doable, but not ideal.
Option 6: Suppose I cut my employees' hours from forty hours to four hours per week, but pay them each the same four hundred dollars per week as before. I could explain this a number of ways, such as putting down that they worked forty hours even though they didn't, or raising their salary to one hundred dollars per hour, or simply switching them from an hourly rate to a weekly rate. This could run into problems in the case of someone working overtime or calling off, but for the most part, I'm both spending and operating at the same rate as before. Additionally, I'm saving money on overhead, because I now have an extra thirty-six hours per week where the lights are turned off, heaters and air conditioners aren't running, and no one is using the restrooms, so I'm saving money on both electricity and water. On top of that, my employees can use their newfound free time for recreational activities, which increases the gross domestic product. Option six is the most practical option by far. And yet, it just doesn't seem kosher, does it?
