posted on 02 January 2016
from the Philadelphia Fed
-- this post authored by Noelle S. Baldini
Job creation has long been seen as a worthy goal that supports economic growth while providing opportunities for the local workforce. Increasingly, however, stakeholders are beginning to ask whether success should be measured purely by the quantity of jobs created without regard for the quality of those jobs.
This article explores various efforts that are underway to encourage the creation, dissemination, and integration of job quality standards into investment, philanthropic, and economic development efforts aimed at job creation.
The Case for Quality Jobs
Currently, most investors, foundations, banks, and government entities are "counting jobs in specific [low- and moderate-income] zip codes without paying attention to the quality of these jobs," said Andrea Armeni, cofounder and executive director of Transform Finance, a San Francisco - based nonprofit organization. Transform Finance's mission includes bridging finance and social justice, and quality job creation is one area through which the organization seeks to achieve that goal.
Transform Finance recently received funding from the Ford Foundation and Surdna Foundation to develop implementable job quality standards that can be used by impact investors, foundations, labor organizations, and government "to ensure that jobs created aid in breaking the cycle of poverty versus perpetuating it," said Armeni. Often, job creation leaves many workers dependent on government services because wages are too low to allow for self-sufficiency. Furthermore, Morgan Simon, cofounder and chair of Transform Finance, notes that job creation is a "slippery" metric. The only factors that truly create new jobs are market demand and innovation, so the goal of mission-driven funders and investors, Transform Finance believes, should not be to increase the quantity but rather the quality of those jobs.
In 2009, the New Hampshire Community Loan Fund invested in VXi, a Dover, NH - based maker of corded and wireless telephone headsets. This investment allowed VXi to more than double in size, reach record profitability, and institute an employee bonus plan. When the owners sold the company three years later, each employee received a share of the proceeds, and the new owners were so impressed with the staff that they kept it intact.
Photo Credit: Geoff Forrester Photography, Courtesy of NH Community Loan Fund
Helen Neuborne, director of Quality Employment at the Ford Foundation, agreed. "We no longer live in a country where someone can simply 'pull themselves up by their bootstraps.' Growing inequality is not a result of a lack of willingness to work but the result of a lack of quality jobs," said Neuborne. The work of Neuborne's team has expanded since the program's start in 2003, as the foundation deepened its commitment to addressing inequality. The Quality Employment unit makes grants in three programmatic areas to improve economic opportunity for low-wage families. The first supports effective strategies for workforce development to improve access to quality training and jobs for low-wage and disadvantaged workers, especially immigrants; the second seeks to improve the quality of jobs held by low-wage workers by ensuring paid sick days and paid leave, expanding unemployment insurance, and raising the minimum wage; and the third is working with states to expand the availability of and access to work supports (e.g., the Supplemental Nutrition Assistance Program [SNAP], child care, and health care) that promote greater job stability.
The Ford Foundation believes that the lack of quality jobs is not only bad for workers but also for businesses and the broader economy. "Businesses will not thrive in an environment where people do not make enough money to consume. With the middle class hollowing out, demand from consumers for products and services is decreasing," said Neuborne. Low wages are an obvious element of poor-quality jobs, but a shift to part-time and subcontractor jobs with no benefits and volatile schedules is also a concern. To have a strong economy, Neuborne and the Ford Foundation believe more attention should be placed on building a solid workforce, and they have supported this belief with roughly $100 million in grants toward quality employment.
Zeynep Ton, an adjunct associate professor in the operations management group at MIT Sloan School of Management, also believes that investing in the workforce can have a positive economic impact. Ton's book, The Good Jobs Strategy, examines operational strategies that businesses can use to improve employee satisfaction, leading to increased productivity, operational efficiency, and customer satisfaction. Ton's research also explores "the presumed trade-off between investment in employees and low prices"; she argues that both can be simultaneously achieved by "a combination of investment in workforce and operational practices that benefit employees, customers, and the company."
Ton explains that most companies see labor as a cost instead of as an asset to be invested in. Retailers such as Costco, Trader Joe's, QuikTrip, and Mercadona take the opposite approach by prioritizing investments in their workforces. These companies have documented effects such as decreased employee turnover and increased employee satisfaction while keeping prices low through strategies such as offering fewer product varieties and cross-training employees to cover a variety of responsibilities. Although Ton's research has primarily focused on retailers, she believes that these principles can be applied across industries.
Ton's research is important for funders such as Shawn Escoffery, program director for the Strong Local Economies Program at the Surdna Foundation. The foundation's Strong Local Economies Program aims to encourage collaboration geared toward improving the quality of jobs in the lower wage sectors of the economy while creating access to career pathways to good jobs in emerging industries. Escoffery believes that the presence of a sustainable business model is key to successfully improving job quality. "If the business cannot survive and grow, there will be little to no job creation, so we are also looking for ways to strengthen and support small businesses in their efforts to put workers first," said Escoffery.
Supporting and Measuring Quality Job Creation
Escoffery explained that "tying strings to capital" is one effective way to encourage this behavior change. Emerging best practices for investors promoting job quality include a "floor-and-ladder" approach, which was designed by Transform Finance for the California-based mezzanine fund HCAP Partners. This approach assesses where a business currently is in a number of categories and provides action steps that will allow the company to climb the quality "ladder" over time. Lenders, such as Fund Good Jobs and Social Capital Partners, have offered reduced interest rates for businesses that meet certain job quality standards or commit to hiring employees from underserved areas.
Growth Opportunity Partners, or "Growth Opps," is a nonprofit organization based in Cleveland that was founded in January 2015 by JumpStart, a nonprofit organization that provides equity capital and technical assistance to early-stage ventures in Ohio. Since its founding earlier this year, Growth Opps has approved six loans and anticipates the average loan to its clients to be approximately $275,000. The organization plans to become a community development financial institution (CDFI). "Job quality is central to our mission and is much more than simply checking a box," shared Michael Jeans, president of Growth Opps.
Rustic Crust, located in Pittsfield, NH, was on a fast-growth track. With its all-natural pizza crusts being sold in grocery stores across the country, the company needed additional working capital and some new equipment to increase productivity. Rustic Crust's management team was experienced and had managed the company for strong profits and good jobs. The New Hampshire Community Loan Fund's investments from 2009 to 2014 allowed Rustic Crust to triple in size, add more than 80 jobs, and acquire a new product line.
Photo Credit: Cheryl Senter, Courtesy of NH Community Loan Fund
Jeans explained that Growth Opps' approach involves creating a mechanism that supports employee skill building and puts employees on a path to obtaining a living wage (or beyond). Growth Opps calls this mechanism the Milestone Funding Process (MFP) and uses it to keep its clients focused on the creation of "meaningful wage jobs" and opportunities. If given the proper training, each employee can be on a path to obtaining a "meaningful wage" within 12 months, said Jeans. Growth Opps defines a meaningful wage as one that is at or above the federal living wage and that provides wealth-building opportunities such as retirement planning. The MFP requires business owners to reach agreed upon financial performance metrics and job quality outcomes - milestones that allow them to access the next layer of financing from Growth Opps. The intended use of the loan proceeds is written into the loan agreements, which Jeans explained not only holds the client accountable but also ensures that the business can afford the increased cost. "We are working with the employer to benefit both the company and the employee," Jeans said. He believes that this strategy will decrease turnover that occurs when lower wage employees seek new jobs to obtain nominal pay raises, sometimes as low as 25 to 50 cents per hour. Growth Opps sees this strategy not as a "benevolent exercise" but as one that will result in a more engaged, stable, and productive workforce, which should translate to increased profitability for the company.
In contrast to the approach of Growth Opps, Daniel Brett, manager of InSight at Pacific Community Ventures, finds a "lack of evidence of many CDFIs actively promoting and measuring job quality." Pacific Community Ventures (PCV) is a CDFI based in San Francisco whose services include technical assistance and capital for small businesses, as well as impact evaluation, research, and strategic consulting for CDFIs, foundations, and other capital providers within the impact investing space. PCV's recent research aims to highlight best practices, recommendations, and insights from CDFIs currently engaged in measuring and supporting job quality. Brett believes that the lack of CDFI engagement on this topic can be attributed to uncertainty regarding the definition of a quality job and to the fact that CDFIs' sources of capital - namely, government, foundations, and banks - do not require this measurement. PCV's research will highlight several job quality categories that it hopes will be incorporated into CDFI underwriting and reporting requirements in the future. Categories include:
PCV believes that although ongoing measurement is key, providing potential CDFI borrowers with a "checklist" of job quality categories to be considered during underwriting could become a promising strategy.
Considerations and Potential Challenges with Job Quality Measurement
Some CDFIs, however, are cautious about incorporating job quality standards into underwriting because they feel these standards could become a barrier to accessing capital. Joan Brodhead, executive vice president and chief operating officer at Community First Fund, a CDFI based in Lancaster, PA, believes that job quality standards should not inhibit access to capital but rather should be tracked over time to gauge progress. John Hamilton, vice president of Economic Opportunity at New Hampshire Community Loan Fund (Community Loan Fund), a CDFI that offers both royalty financing and loans to businesses with one to 75 employees in New Hampshire, agrees that as long as a business is "willing and coachable," his team can work with the business to improve job quality standards over time. "Although a loan to a business that already has an 80 percent job quality rating may look more impactful," said Hamilton, "we believe working with a business that begins at 30 percent and improves to 80 percent over the course of our involvement with them will have a much greater impact." Although promoting job quality is central to the mission of the Community Loan Fund's small business lending, Hamilton explained that it is also a way to mitigate risk. "When businesses rely on one smart person making all the decisions ... that's risky," said Hamilton. By investing in employees, small businesses are developing talent at all levels, often improving their bottom line in the process.
Although job quality is a major focus for the Community Loan Fund, Hamilton shared what he views as challenges with creating job quality standards. For example, it is difficult to measure job quality and engagement quantitatively. The Community Loan Fund plans to increase its work with portfolio businesses to conduct employee surveys to measure factors such as engagement and satisfaction as well as to ask employees what matters most to them. This may better define quality from the eyes of the job holder, thereby customizing job quality measurements according to the unique culture, industry, size, or age of a business and the employees who make up that business. Hamilton is mindful of not "holding businesses to job quality standards that don't make sense for them and create a lot of additional paperwork." He also shared that the Community Loan Fund must overcome businesses' skepticism that as a nonprofit, mission-driven lender, it may bring an agenda that is not rooted in strong business practices or may not be an investor that is able to add value to the businesses' bottom line. The Community Loan Fund is able to create strong relationships with businesses throughout the state by limiting the reporting requirements of portfolio companies and working with businesses to create customized strategies for improving both job quality and business performance. Additionally, the Community Loan Fund provides financial incentives to portfolio companies that are able to achieve customized job quality goals.
Several efforts are underway to develop job quality standards that could be incorporated into investing and philanthropic decision-making. Improvements in job quality would be beneficial not only for workers but also for businesses and the broader economy. Focus will need to be placed on ensuring that these standards will be in line with what is possible for businesses, understanding that if a business is not sustainable, neither will be the jobs that it offers. It is also important to ensure that efforts to improve job quality do not reduce job access for difficult-to-employ populations.
The views expressed here do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
1 See www.transformfinance.org.
2 Morgan Simon, "Managing vs. Measuring Impact Investment," Stanford Social Innovation Review, March 20, 2015, available at http://ow.ly/UiN5o.
3 Zeynep Ton, "Why 'Good Jobs' Are Good for Retailers," Harvard Business Review, January - February 2012, available at http://ow.ly/UiMYI.
4 See Zeynep Ton's Harvard Business Review article for a more thorough explanation.
5 See Keith L. Rolland and Noelle S. Baldini's "Investing to Create Good Jobs" article in the Fall 2015 issue of Cascade for a full description of the floor-and-ladder approach, available at www.philadelphiafed.org/community-development/publications/cascade/89/02_investing-to-create.
7 See www.fundgoodjobs.com.
9 See http://growthopps.org/#page.
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