Influence of Financial Institutions on Labor Markets in the United States

Susan Houseman Upjohn Institute for Employment Research

Presentation prepared for conference on Financial Institutions for Innovation and Development, November 10-11, 2014, Berlin

Motivation Maximizing share holder value dominant ideology

since 1990s Emphasis on short-term net earnings growth

(quarterly numbers)—Reflects o Change in ideology o High discount rates and/or imperfect information

investors have about value of long-term investments Consequences include:

o Decline in long-term R&D investmentso Use of stock buy-backs to boost short-term stock

prices Related developments have affected structure of

labor markets with profound implications for workers.

Impacts on Labor Markets, Implications for Workers: Overview

Changes in structure of labor markets—several mechanisms1. Decline of vertically integrated firm:

Shedding low value-added, low profit margin businesses

Replace with complex domestic and global supply chains

2. Use of contract workers in lieu of direct-hire employees

3. Changes in HR policies for employees

Implications for workerso Decline in quality of jobs—as measured by

compensation, job securityo Less training, investments in human capital

Decline of Vertically Integrated Firms

Large integrated firms have sliced up the value chaino Shed low value, low profit components of businesso Still control the supply chain—often complex

network of domestic & global supplierso Dominant firm may squeeze profits from supplier

firms Evidence:

o Decline in firm size (employment) in U.S.o Increased trade in intermediate inputs—worldwide

phenomenono Growth of “factoryless goods producers”

Decline of Vertically Integrated Firms: Implications

Implications for workerso Large integrated firms historically paid high wages—

workers shared in profitso Slicing up of the value chain Downward

pressure on compensation for workers in competitive supplier markets

Examples:o Tech firms like Appleo Retail chains like Walmarto Franchise model

Staffing Practices: Use of Contract Workers

Workers performing tasks for organization at organization’s worksite are not employees

Examples:o Independent contractors (self-employed)o Temporary help employees – hired through staffing

agencyo Other contract company workers – hired through 3rd

party intermediary (e.g. IT firm, logistics firm) Organizations use contract labor to lower costs

o Increase workforce flexibility – easier to flex up or down workforce, workers only paid when needed

o Avoid benefitso Lower workers’ compensation (disability insurance),

unemployment insurance costso Screen workers for permanent positions

Staffing Practices: Use of Contract Workers

Implications for workerso Often lower compensation, especially on benefitso Lower job security – shifts economic risk onto

workerso Some concerns over worker safety – inadequate

training when “joint employer” relationshipso Some concerns over fraud

increases risk of wage and hours violations, fraud related to unemployment insurance &

workers compensation common Incidence and trends in contract employment

o Generally believed increasingo Only well measured for staffing industry in U.S.o Europe & Japan seen similar growth in staffing

services and other temporary (fixed-term contract) employment since 1980s

Staffing Services Employment, % of Total

Employment highly cyclical—workers absorb disproportionate of the job losses in recessions

Record number in staffing services:o 2.6% in staffing services—most temporary

help workers

Contract Workers: Staffing Services

Staffing services employment concentrated in manual, low-paid jobs—account for o 8% all workers in production occupations

16% all assembly line workers 29% all production worker helpers

o 17.5% all workers in material moving occupations

Staffing employment also rapidly growing in professional & technical occupations

HR Practices: Layoffs and Tenure

Layoffso Temporary layoffs always common in U.S.o High profile companies offering Japanese style

lifetime employment in 1980s—e.g. IBM, Kodak—gone

o Permanent layoffs become common mechanism for increasing short-term net revenues

o Effect of loss of human capital on long-term productive capacity not emphasized

Large decline in corporate executive tenure since 1980o Median company tenure of top executives dropped

by 7.5 years from 1980-2005 (Cappelli and Hamori) o Shorter tenures may lead to shorter time horizons

for investment paybacks

HR Practices: Training Investments

Are companies reducing investments in human capital?

Debate over whether “skills shortage” in increasing unemployment sheds light on question.

Evidence of skills shortage:o Pro: employer surveys suggest significant minority

cannot find workers with right skills (Osterman and Weaver)

o Con: Wage levels are stagnant (Rothstein) Reconciling conflicting evidence:

o Employers less willing than in past to train their own workforce

o Expect applicants already have relevant training—unrealistic (Cappelli)