What effect has shareholder value had on employment?

November 7th & 9th, 2012

1. 2. The 1%ers vs. the 99%ers How do we explain this inequality?
a. b. c. Technology? Perhaps, but there are problems. Globalization? Some evidence, but this, too, is missing some things. Rise of shareholder value conception of the firm!

3. 4. 5.

The employment relation within firms is governed by social institutions The shift to a shareholder value conception of the firm has led to a more cutthroat world for the American worker Evidence from Enron

Percentage of Americans income going to top 10% of households

from: The costs of rising income inequality The Washington Post Wednesday 6 Oct 2010; data from Piketty & Saez

Source: Thomas Piketty and Emmanuel Saez. Chart by Catherine Mulbrandon of VisualizingEconomics.com.

Thomas Piketty and Emmanuel Saez. Chart by Catherine Mulbrandon of VisualizingEconomics.com.

Wealth as opposed to Income

Richest 1% account for 35% of nations net worth
This becomes 43% if you subtract housing (which is typically the only form of equity that lower-income Americans own themselves; the point being that the very wealthy have all sorts of equity other than their homes)

Richest 20% account for 85% of nations net worth

Subtract housing and this becomes 93%

The problem of crowdsourcing: respondents guessed that the top quintile only accounted for 59% of all wealth
(But not so much now, in the wave of Occupy Wall Street protests.)

Automation!

Explanation #1: Technology

Technology does not automate low-skilled jobs very well Technology does not automate extremely high-skilled jobs very well But technology DOES automate middle-skilled, middleincome jobs

Thus, the hollowing out of the middle class occupational and income structure

from Kalleberg, Good Jobs, Bad Jobs ch 4

Problem: computers didnt enter the workplace until at least the early 1980s

From: Erik Brynjolfsson, The Productivity Paradox of Information Technology (1993).

Explanation #2: Globalization

Manufacturing jobs have increasingly moved overseas where wages are much lower (e.g., China/Foxconn)

American manufacturers either:

Go out of business Must reduce wages & benefits to compete Shift their manufacturing operations overseas themselves

Rank

Country
Total, All Countries Total, Top 15 Countries

2011 Imports (millions of $US)

% of Total Imports, 2011

2,207,823.9 1,629,326.3 399,361.9 315,346.5 262,864.4 128,924.6 98,662.6 56,661.2 51,236.1 47,476.3 43,256.4 41,404.8

100.0% 73.8% 18.1% 14.3% 11.9% 5.8% 4.5% 2.6% 2.3% 2.2% 2.0% 1.9%

1 2 3 4 5 6 7 8 9 10

China Canada Mexico Japan Germany South Korea United Kingdom Saudia Arabia Venezuela Taiwan

11
12 13 14 15

France
Ireland India Russia Italy

40,039.6
39,369.6 36,152.8 34,619.0 33,950.5

1.8%
1.8% 1.6% 1.6% 1.5%

Sources: Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez. Chart by Catherine Mulbrandon of VisualizingEconomics.com.

Explanation #3: Rise of shareholder value

Explanation points to the structure of the employment relationship rather than the polarization of the occupational structure Organizational theory: employment, like other aspects of organizations, is not simply a pure market relationship between buyer (employer) and seller (worker) of labor power It is shaped by social institutions

From: A. Kalleberg, 2008 ASA Presidential Address

Three institutional elements of LABOR MARKETS

What is the notion of a career?
How are wages determined? What kind of job security do employees have?

INDUSTRIAL UNION model

Exemplified by the UAW and the Big Three automakers Seniority, not individual merit, determines wages Job duties were specified in detail by contract The firm was free to adjust employment levels by layoffs, though most layoffs were followed by recall These institutions were adopted to a large extent even in nonunion sectors

PATERNALISTIC CORPORATION model

Exemplified by IBM Aggressively nonunion Wages were determined to a greater extent by individual performance Job descriptions were flexible

Internalized Careers
Corporations were characterized by expansive internal labor markets Typically, you entered a firm at the bottom of the job ladder and spent your career moving up it

Job Security
White-collar workers were treated as fixed factors in production Blue-collar workers experienced more instability, but even for them layoffs were generally temporary

Wage determination
Wagesi.e., the price of labor on the labor marketwas to a significant extent not determined by market forces

Instead, wages were structured by:

Norms of fairness in pay across different jobs Stability across firms and industries (pattern bargaining) Profit sharing with employees in good times

HOW did things change?

Job Security / Internal Labor Markets the Rise of Contingent Employment Equity and stability in wage determination pay based on firm performance and occupational characteristics

Contingent Employment
The increased incidence of temporary work The increase of part-time work The destabilization of even regular employment (layoffs)

Layoffs: not just because were struggling

From: Paul Osterman (1999), Securing Prosperity.

Job security isnt what it used to be

From: Paul Osterman (1999), Securing Prosperity.

from: Kalleberg, Good Jobs, Bad Jobs ch. 5

Virtues of the shareholder value explanation

Accounts for changes in internal firm organization, even in large corporations whose operations are not dependent on offshoring and trade (e.g., Enron).
Timing matches up better than technology stories.

Back to Enron
Enron was an illustration of new employment institutions Everyone for themselves to close deals (Hobbesian) Employees who did not produce fared poorly in Enrons dysfunctional PRC employee evaluation system and were FIRED Employees who did produce were rewarded with bonuses, perks, and stock