a rise in between-firm inequality suggests that the US and other leading economies are becoming a more economically segregated, in the sense that those with high pay and those with lower pay are becoming less likely to have the same employer. It means that the classic “American dream” success story, of someone being hired in the mailroom or as a secretary or janitor, and then getting promoted up the company ladder, is less likely to occur. Nowadays, those jobs in the mailroom or the secretarial pool or the janitorial work are more likely to involve working for an outside contractor. In that sense, some of the rungs on the bottom of the ladder of success have been sawed off.
My thoughts:
1. Perhaps there has been an increase in specialization and a decline in substitutability in labor. In the 1950s, there were a lot of good jobs around that anyone could be trained to do. Today, most of the good jobs require that you have a strong mix of training and credentials to get started. George Romney (Mitt’s father) rose through the ranks at a large automobile company. Today, his lack of formal training would make that impossible.
Note that if there has not been a decline in substitutability, then one is probably going to have a very difficult time explaining this “segregation” phenomenon using strictly economic analysis.
2. Perhaps the phenomenon can be explained in part by Tyler Cowen’s “matching” story. Even among people with equal levels of formal training, perhaps the strongest firms have gotten better at finding the workers with the greatest intangible strengths. Perhaps the ability to match in that way is what makes the strongest firms strong and what enables workers with great intangible strengths to get rewarded.
3. Perhaps what is needed and rewarded in today’s workplace is the ability to work adaptively in teams. That makes organizational culture a key determinant of success. A firm with a better organizational culture can maintain a large advantage over other firms. Such a firm can hire better workers and also reward them better.
4. Speaking of “culture matters,” I recommend Scott Sumner’s post on two Michigan cities.
There’s a simple spatial element to consider, given the costs involved in corporate structure. In the seventies for instance, it was still reasonable to build new corporate offices for national companies which included secretarial and other supporting staff. Even though my contribution at the time was only in accounts receivables, we were nonetheless provided space alongside the founder of the company, the CEO and other top managers, in their beautiful new office building. I doubt many large companies could do the same today with a full staff, for the costs of real estate have changed the logic of that equation. Hence outsourcing for office staff to other “lesser” companies. Of course, the latter consequently lack a mechanism for moving up in the organization.
My theory is specificity in Garret Jones type labor. What works well at creating a great stream of dominant products at Google apparently doesn’t even translate to a fairly similar company like Yahoo. Too much is dependent on the specifics of a company’s market position and it’s idiosyncratic capabilities.
Note that this actually has prescriptive value at the individual level. Keep joining a sequence of Series B funded companies until one of them goes exponential and then milk it for all its worth.
Are the best companies better at hiring the best talent, or better at developing the best new talent into the best experienced talent? (Perhaps by accident – in one place I worked the culture and economic circumstances drove a lot of staff growth.)
That is, if A does a better job than B hiring the best talent, AND A does a better job than B developing the best experienced talent over time, then at various levels of talent/experience A will have the upper hand over B.
In markets with large global selection effects (everybody in the economy can buy the product from a single producer – think amazon, google, microsoft, apple) A being just a little bit better than B can result in a much larger market or profit share than B.
Causal density:
* Decline of manufacturing firms, which employed a lot of labor with a pyramidal management structure and some auxiliary departments like R&D. When manufacturing is offshored, the upper part of the pyramid and the R&D folks remain but the broad base goes somewhere else. Automation has a similar effect to offshoring.
* Reduction of “lateral” opportunities due to information technology. Infotech greatly eases outsourcing of logistics, plant operations, bookkeeping, payroll, etc. functions as well as manufacturing. Many functions are now performed more by specialist firms and traded among firms with different specialties. This provides real efficiency gains (especially in the pseudo-economic category of “regulatory compliance”) so it persists, but: Entry-level positions in many fields no longer come with any chance to change personal specialization by “lateral” movement within firms based on impressing co-workers (especially managers in other departments) with skills or winning personality. This puts a dreadful premium on choosing a first specialization and first employer. Firms used to– often still do– have policies giving at least mild hiring preference to current employees over outside applicants. Such policies are non-pecuniary rewards and foster worker loyalty. Even firms without formal policies often have informal ones, if only because familiarity breeds attempt. But formal or informal (or even unconscious) “consider current workers first” policies don’t help applicants who are nearly always “outsiders” because they work for other, specialty firms.
* Regulatory pressure against complex firms. Although we often note that regulation favors big firms (they can spread compliance costs across a bigger base), many regulations also favor homogenous firms. As noted just above, firms partly specialize in the business of complying with one regulatory realm or another. But beyond that, “worker equity” and “all or none” regulations restricting fringe benefits and pensions press firms to split and outsource functions. A complex firm might wish to compete to hire highly-educated R&D staff by offering generous pension contributions. When regulations demand that such a firm provide the same pension terms to janitors as to top engineers, the firm is pressured to outsource cleaning services. A slight loss of efficiency to outsourcing is more than compensated by avoiding uncompetitive pay mandates.
* A special case of regulatory pressure against complex firms is Obamacare. For active workers the “Obamacare marketplace” for “health insurance” other than employer-provided health insurance is now grotesquely horrible, so firms are under great pressure from their more valuable workers to provide employment-based insurance. Yet Obamacare mandates make the provision of employment-based health insurance very costly, and forbid single firms to provide health insurance to some of their workers and not others. This prompts firms to break up into cooperating specialty firms, separating the highly-compensated (including health insurance) workers from the others (who are then tossed into Obamacare’s piranha tank).
* Mass immigration promotes firms that specialize in speaking strange languages and accomodating the cultural quirks of various groups of immigrant workers. This too is mixed up with regulatory compliance. Managers of complex firms are reluctant to take on the (personally-devastating, even if modest in proportion to the whole firm’s bottom-line) risks of lawsuits and EEOC complaints over discrimination, sexual harassment, etc. plus the daily hassle of dealing with workers who are hard to talk with and prone to (locally) odd behaviour. Better, they often think, to deal with a specialist firm that packages up immigrant labor into a more manageable and less risky business relationship. (In addition, in some fields, firms tend to segregate and shrink because immigrants in management discriminate viciously in favor of their co-ethnics. Workers with any kind of choice want to report to managers of similar background so as to get a “fair shake.” This is seen fairly often in Silicon Valley.)
Reminds me of this 1989 vintage piece by Peter Drucker:
http://www.wsj.com/articles/SB113202230063197204
Your explanation should lead to more income to firms, but on the margin national income is going to rental income. Within labor and capital, there is more variance, but it is real estate that is claiming more. I think a large part of this is geography. In housing constrained cities, incomes are higher. So gross income to firms and workers are high there, but the limited asset is housing, so much of that excess income goes to the landlord. This is why wages within those firms are higher throughout the firm.
I have a few hunches, and one of them is to wonder whether globalism has meant that certain activities are more likely than others to be shifted abroad. That is, whenever we are looking at the US picture these days, we are missing some of the big picture, the middle of which has been hollowed out and now belongs to “somebody else’s statistics”. That’s part of what might make the purely domestic scene more bifurcated and with greater skew to the top.
More of a winner take all model of competition these days in many industries.
On Sumner:
Culture is important after controlling for IQ. Once we control for IQ, is conservative/religious culture and homogeneous social groups good for growth? Good for other social indicators? Good for living the good life?
Most of the correlation here is just “where do high IQ people live.” With “culture” simply describing the behavior of people at different IQ levels.
Once we account for that though, the data all seem to show that conservative social attitudes, religion, and homogeneous social groups lead to better outcomes. This is especially true the further you go down the IQ ladder (where such traditions prevent catastrophic life outcomes), but they are beneficial at the top of the ladder too in terms of reaching ones potential for the good life (more marriages, more children, strong communities, higher life satisfaction).
I think there are several things:
1) WE forgot how tight labors became during the 1950’s when you think that the percentage of jobs created during the Eisenhower administration (~1.1%) was equal to the percentage of jobs created during the Obama administration (~1.05%). (And think Obama dealt with both The Great Recession and a decrease of public payrolls.) Due to the 1930 baby bust and WW2 with a significant sex and race discrimination, all the developed world had tight labor markets.
2) There was a lot of believers in the Branch Rickey farm system after the success the Cardinals had 1930 – 1940s. They were not a rich team (and could buy the great prospects like DiMaggio or Lefty Grove) and did it mass training and farm system. That was the basis of a company thought in the 1950s.
3) As the labor supply exploded in the 1970s, workers had to learn to separate themselves (college or credentialing grew a lot 60s/70s) while companies had to break from the Rickey school of training. (Notice Sports moved to the draft system in the 60s/70s.) If you don’t believe about labor supply in the 1970s, remember job growth during the Carter was higher than either Reagan or Clinton term.
But if George Romney were starting out today, I suspect he would have gotten a college degree…