Analogous innovation-driven transformations reappear across finance. (Some jobs—for example, insurance claims adjusters—replay the pattern down to the smallest details.) Task intensity analysis using the Dictionary of Occupational Titles reveals that whereas midcentury production weighted complex and simple tasks roughly equally (and only modestly more heavily than the rest of the nonfarm private sector), finance today emphatically focuses on complex tasks, to the exclusion of simple ones. In particular, finance requires decidedly more intricate communication, analytic, and decision-making skills than other sectors.
The mid-skilled, middle-class workers who had dominated midcentury finance became increasingly unequal to the rising complexity of financial tasks, and the new financial methods drew super-skilled workers into financial production. Across finance, the share of total hours worked by clerks and administrative employees has fallen from nearly 60 percent in 1970 to barely 30 percent in 2005, while the share of hours worked by managerial and professional staff has risen from roughly 25 percent in 1970 to 45 percent in 2005. The educational gap between finance and other workers has grown by a factor of seven since 1980.
Throughout this process, the most rapid rise in employment share within finance has come from the most elite subgroups in the finance workforce: the labor share provided by specialists in computers and mathematics has grown by a factor of six between 1970 and 2005, and the share provided by securities and asset traders has grown by a factor of nearly thirty. The concentration of training and skill at the very top of the financial workforce is breathtaking. The most elite financial firms, which pay by far the highest incomes, draw their workers overwhelmingly from the most competitive—and most exclusive—universities.
Indeed, banks now advertise their own super-eliteness in their recruiting pitches, making claims such as “We hire only superstars,” and “We are only hiring from five different schools,” and telling their new employees that they are “the cream of the crop.” Elite graduates reciprocate the banks’ affections: roughly half of the graduating classes at Harvard, Princeton, and Yale now interview with Wall Street firms or their affiliates, and perhaps a third of graduates actually go to work in finance. At Harvard Business School, where 1.3 percent of the class of 1941 took finance-sector jobs, about 30 percent does now (more than goes to work in any other sector).
The transformation drives the sector’s growth and, finally, feeds back into finance workers’ incomes. At midcentury, finance effectively mirrored the broader economy—with ordinarily skilled, ordinarily productive workers making ordinary incomes—and grew slowly, by adding new workers to do familiar tasks. Then, beginning in the 1970s, finance’s share of GDP grew dramatically, but the new technologies, combined with finance workers’ greater skills, sufficiently increased productivity to allow the sector to employ a stable or even falling proportion of the overall workforce. When fewer workers produce more, wages rise. Today, finance workers are both much better educated and much more highly paid than other private-sector workers.* Indeed, they are paid more even than other elite workers. First-year salaries out of Harvard Business School are now higher in finance than in any other sector (by about a third). And the potential for income growth is astronomical—the top hedge fund managers make literally billions of dollars a year.
Finance writ large reprises the path taken by home mortgage finance. Financial production has been transformed from the broadly democratic, mid-skilled enterprise that The Economist described to the field that embodies the superordinate working class more vividly than any other.
MANAGEMENT
Management has followed finance’s lead. Whereas midcentury management was strikingly democratic, management has become meritocratic today: both managerial work and its rewards, once widely shared, are now concentrated in an increasingly narrow elite. New technologies have transformed how American firms are run, partitioning the mass of midcentury middle-class organization men into many subordinate production workers doing gloomy jobs and a few superordinate executives doing glossy ones.
Managers came surprisingly late to the American workforce. In the early years of the republic, relationships between workers and firms were too short-lived for management even to take hold of them, and as late as the early 1900s, the turnover of industrial workers in the United States remained about 100 percent per year.
Nineteenth-century steelworkers, for example, worked as contractors or even subcontractors, paid by the ton of steel that they produced, and coal miners and mine owners contracted separately for the mining of each individual rock face. Even manufacturing companies did without much management. The Durant-Dort Carriage Company (probably the leading seller of carriages and then automobiles in the late nineteenth century and an ancestor of Buick, Chevrolet, and eventually General Motors) built virtually nothing itself and had few employees. Instead, for most of its early history, the firm mostly marketed goods that it commissioned to be manufactured by others.
For much of the nineteenth century, the American economy made do with virtually no managers at all. Although the mechanical technologies and scale of production had become industrial, the institutional model of work remained artisanal. Individual, self-employed workers engaged large industrial concerns at arm’s length, through contracts for specified outputs, rather than selling their labor power as employees. And nineteenth-century executives, for their part, were not true managers but rather owners of enterprise—the equivalent of present-day venture capitalists—who focused on financing rather than administration, labor monitoring, or quality control. Without employees to coordinate and command, there could be neither management nor managers.
The state of technology explains why nineteenth-century firms included virtually no managers. The goods and services that dominated the economy remained relatively simple and therefore easy to describe in contracts and to price. Moreover, managerial coordination’s core technologies—office devices such as the telephone, vertical filing cabinet, modern (often high-rise) office block, and of course computer—had not yet been invented.
This changed dramatically between 1850 and 1950, as a set of interlocking technological innovations revolutionized economic life and brought management to the American firm. By the time the revolution was completed, management would saturate the firms, so that effectively every worker would become, in functional terms, partly a manager. The midcentury economy owed much of its democratic character to these developments. Indeed, the management function’s wide diffusion throughout the workforce (including into jobs commonly thought to belong not to “management” but to “labor”) substantially built the midcentury middle class.
On the one hand, the increasing complexity of manufactured goods and the increased scale of industrial production raised the costs of coordination by contract and created a demand for a managerial alternative. As sewing machines became more complicated, for example, the Singer sewing machine company found itself unable to ensure sufficient quality, reliability, and uniformity in the parts that it bought on the market. The firm began to make them instead; and making parts internally naturally required Singer to establish increasingly elaborate managerial hierarchies to monitor and coordinate internal production and secure the quality, reliability, and uniformity that the firm sought. This pattern recurred across firms throughout the Industrial Revolution, as no less than Frederick Winslow Taylor observed that mass production of complex goods would “involve new and heavy burdens” for management of industrial firms.
On the other hand, innovations in managerial technology considerably increased the supply of managerial coordination, making it possible for management to track and to direct more workers, in greater detail, than ever before. Innovations in firm organization leveraged these technologies. Armies of elaborately layered middle managers coordinated production among long-term employees, who were taught through internal training to adapt their skills specifically to the firm’s production processes, and made loy
al and willing to accept the vulnerabilities attendant to training tailored specifically to a single employer by lifetime employment and wide-ranging opportunities for internal advancement.
Even the unions that organized and protected lifetime employees—which at their midcentury peak represented fully a third of the U.S. private-sector workforce—in their deep structure constituted a form of managerial coordination (or “industrial self-government,” as the U.S. Supreme Court observed in 1960). Union leaders were themselves in function a variety of middle manager. And the unionized production worker was transformed, by lifetime employment and internal training, into the lowest level of manager. In the structural sense, the lifetime production worker—the pinboy-cum-diemaker in St. Clair Shores—was charged with developing, or managing, his own human capital in order to maximize its long-run value for his firm.
These developments ushered in the employee-based, hierarchical, intricately managed American firm, which reached its pinnacle during the middle-class boom at the middle of the twentieth century. Effectively every employee, from production personnel right through to the CEO, belonged to an unbroken managerial continuum, with each job in the firm closely resembling its nearest neighbors. Armies of middle managers, capable of independently coordinating production, shared not just the burdens and responsibilities but also the income gained from running their firms. (Strong unions extended this effect to production workers by organizing the lower rungs of a firm’s hierarchy into an alternative control center.) And top managers forswore a share of that income in exchange for the comfortable ease and cultured lifestyle embraced by the leisure class to which they belonged.
The Durant-Dort Carriage Company literally became General Motors, whose enormous size and broadly middle-class workforce could enable its CEO Charles Erwin Wilson (who had himself worked his way up the firm’s managerial ladder) to declare in 1953 that “what was good for the country was good for General Motors and vice versa.” The Container Corporation of America even expressed this idea in art, commissioning a twenty-year series of original prints by major contemporary artists on the “Great Ideas of Western Man.” As Tom Wolfe reflected in an essay on the prints, “the ads in this series convey the message: ‘We really don’t do what we really do (e.g., make tin cans). What we manufacture is dignity.’” Management had become strikingly democratic, compressing the distribution of income and status within the firm. Perhaps more than any other sector, management on this model built the broad middle class.
At the end of midcentury, the technological wheel took another turn. The late 1970s and especially the 1980s inaugurated a third age of American management, in which firms returned to the nineteenth-century model, but updated it in light of twenty-first-century technologies. Today, technological advances in measurement, surveillance, communication, and data analysis give top managers immense and unprecedented powers of observation and command.
An elite executive, working from the headquarters of even the largest firm, can almost without delay construct a detailed picture of the work done by nearly every unit of the firm, no matter how small, and even of individual workers. Uber’s algorithms, for example, allow a small cadre of top managers (although Uber is worth over $50 billion, it has only about sixteen thousand employees) directly to coordinate the work of hundreds of thousands of drivers who have literally never met middle management. Walmart executives can know how many cans of tennis balls a branch in suburban Albuquerque has in stock, and how many it has sold in the prior week. Amazon’s management can know how many toy music boxes its Breinigsville, Pennsylvania, fulfillment center has shipped per week for the prior six months. And GE’s bosses can call up the productivity of every assembly line.
Moreover, elite executives do not just monitor but can also direct production workers, often reaching into the finest details of their work. Amazon’s warehouse administration—in which top-down policies regulate production workers’ movements down to the individual step—is just an especially vivid example of a general practice.
These innovations strip the management function from mid-skilled jobs and deprive middle-class workers of the status and income that their managerial responsibilities once sustained. Firms no longer require middle management to mediate between business strategies set by top leadership and the implementation of these strategies among production workers. And production processes that once required all workers to exercise some managerial discretion may now be broken into constituent parts that might be performed mechanically by disempowered workers and coordinated from on high.
As the middle-management function becomes superfluous, firm hierarchies lose their middle rungs. Beginning in the 1980s, an unprecedented wave of corporate restructurings streamlined American firms. It is almost impossible to find any case of corporate downsizing before the mid-1980s, and some large companies even adopted express “no layoff” policies. But now the reorganizations expressly sought to eliminate what the corporate raider Carl Icahn once called “incompetent” and “inbred” middle managers, “layers of bureaucrats reporting to bureaucrats.”
The cull was dramatic: AT&T, for example, restructured one of its units with the express aim of reducing the ratio of managers to nonmanagers from 1:5 to 1:30. Across restructurings in the 1980s and 1990s, middle managers were downsized at nearly twice the rate of nonmanagerial workers. And the share of all managers aged forty-five to sixty-four whose job tenure exceeded fifteen years has collapsed (falling by more than a quarter in just the two decades between 1987 and 2006). The process, moreover, continues today. Algorithmic management consulting firms now expressly seek “not [to] automat[e] [line workers’] jobs per se, but [rather to] automat[e] the [middle] manager’s job.”
All this downsizing is driven by structural considerations rather than by firm-specific economic distress: it hits profitable as well as unprofitable firms, continues during economic booms as well as busts, and peaked during the epochal economic boom in the 1990s. This massive, consciously planned corporate housecleaning of middle managers arose because new managerial technologies rendered the culled workers surplus to requirements—literally redundant.
Over the same period, American companies have also stripped the residual management function from nominally production workers. As unions collapsed—the share of private-sector workers who belong to a union has fallen from about one-third in 1960 to under one-sixteenth today—lifetime and even just full-time jobs were displaced by short-term and part-time ones. The logistics firm United Parcel Service, for example, long famous for using no part-time workers and instead emphasizing internal promotion up an elaborate corporate hierarchy, shifted systematically toward part-time workers in 1993. The firm faced a powerful and popular strike in 1997, fought by the Teamsters Union under the slogan “Part Time America Won’t Work.” Nevertheless, UPS has since 1993 hired over half a million part-time workers, only thirteen thousand of whom have advanced inside the company. At midcentury, unionized production labor also managed its own development within the firm. Today, short-term and part-time workers, hired under ever more tightly controlled contracts, manage nothing at all. Instead, they sell particular skills or even specified outputs.
Often, the very same employees who have been downsized return as subcontractors, in a direct and literal displacement of management by contract as a coordinating method. After IBM’s massive layoffs in the 1990s, for example, as many as one in five laid-off employees returned to work for the firm as consultants.
Other firms were built from scratch on the subcontractor model. Uber drivers are paid not for their effort or even their time but rather for each ride that they complete. The clothing retailer United Colors of Benetton has only fifteen hundred employees but uses subcontractors who employ twenty-five thousand. There exist wineries that contract for grapes with some firms, winemaking with others, bottling with others still, and distribution with yet others, and so have literally no employees at all. And Volkswagen has recent
ly built an automobile plant that is staffed almost exclusively not by its own employees but by workers of its subcontractors.
In the extreme case, new technologies erase the distinction between employees and subcontractors, so that people who are nominally hired to provide their labor in effect sell their output. Amazon’s fulfillment technologies now approach this state of affairs. An algorithmically optimized pattern (called “chaotic storage” because it looks random to the human eye) arranges goods in warehouses. And a precisely mapped (to the foot, using tracking equipment and sensors) set of movements tells workers just how to take goods off of shelves and put them into boxes. In this way, Amazon replaces the middle-class workers who would traditionally have been tasked with managing warehouse administration with a highly centralized administrative regime, which breaks the production process into its constituent parts and then in effect buys each part individually. Amazon aspires to use technology to eliminate human warehouse management entirely, and the firm has to this end spent nearly $1 billion to buy the robotics company Kiva Systems. Meanwhile, the Chinese firm JD.com (which has entered a strategic partnership with Google) has already built a warehouse outside Shanghai at which hundreds of robots pack and ship roughly two hundred thousand boxes per day, attended by only four human workers.
The management function has not disappeared, of course. Instead, the managerial control stripped away from production workers and middle managers has been concentrated in a narrow cadre of elite executives, who are separated from production workers by differences of kind rather than degree. The technologies that underwrite such concentrated managerial power—not just the information systems that monitor organizations and gather and manipulate data but also the ideas and analytic frameworks employed to make sense of the data—are enormously complex. Only intensively trained managers can possibly acquire the sophistication needed effectively to implement the technologies of command that can coordinate production without relying on the many layers of middle management that administered the midcentury firm.
The Meritocracy Trap Page 23