The Meritocracy Trap

by Daniel Markovits

  that administer securitization: These are, of course, the core innovations that built the meritocratic elite.

  down to the smallest details: An insurance company intermediates among policyholders across risks, much as a bank intermediates between savers and borrowers. All policyholders pay premiums that supply the insurance company with capital, which it invests in order to pay out to the subset of policyholders for whom insured-against risks eventuate. Under the midcentury model, insurance claims would be reviewed by a claims representative, who would confirm coverage and then pass the claim on to an investigator. The investigator would use interviews and on-the-ground inspections to determine the validity of a claim and then pass valid claims on to adjusters, who would settle with policyholders. Claims adjusters, investigators, and even claims representatives were all mid-skilled workers, who (filling roles much like the loan officer’s) exercised independent and responsible judgment to determine the validity of policyholders’ claims to compensation for losses. Increasingly, however, traditional claims adjusters are being pushed out in favor of deskilled replacements, who feed machine-scorable data into algorithms, known in the industry as “management information systems,” that use statistical methods to confirm coverage and even detect fraud. See Cappelli, The New Deal at Work, 90–91, 253n.52–53 (reporting on a “study of performance in the insurance industry at the Wharton School”). These systems entirely eliminate claims representatives and vastly reduce the number of investigators—since low-value claims that set off no flags are paid without further review. Super-skilled workers design the new systems, of course. And so insurance claims review has become skill polarized in much the same fashion as home mortgage loan origination.

  to the exclusion of simple ones: See Philippon and Reshef, “Wages and Human Capital,” 1571, Figure VI.

  than other sectors: See Philippon and Reshef, “Wages and Human Capital,” 1571, Figure VI.

  to 45 percent in 2005: See Philippon and Reshef, “Skill Biased Financial Development,” Figure 5. An analysis of workplace task intensity using data from the Dictionary of Occupational Titles similarly reveals that, beginning in the 1970s, the finance sector’s increasingly educated workers have performed relatively more complex and nonroutine tasks. See Philippon and Reshef, “Wages and Human Capital,” 1571.

  by a factor of seven since 1980: Whereas in 1980, finance-sector labor was only 2.5 percent more likely to be college educated than its nonfarm private-sector counterpart, by 2005, the gap had grown to 17.5 percent. These percentages are derived by calculating the share of work hours provided by college-educated workers in each sector. See Philippon and Reshef, “Skill Biased Financial Development,” 8. Note that the precise numbers in the figures and the text of the draft do not agree, for the reason that new data led to some revisions in the text. See email communication of February 23, 2017, on file with author.

  by a factor of nearly thirty: See Philippon and Reshef, “Skill Biased Financial Development,” Figure 5.

  draw their workers overwhelmingly: Ho, Liquidated, 11–12.

  “We hire only superstars”: Ho, Liquidated, 50 (first three quotes), 39 (last quote).

  actually go to work in finance: Ho, Liquidated, 43–66.

  Thirty-nine percent of the members of the class of 2016 at Harvard surveyed by the Harvard Crimson indicated that they would work in either consulting or finance, while the same figure for Yale was 28.2 percent. See Cordelia F. Mendez, “The Graduating Class of 2016 by the Numbers,” Harvard Crimson, accessed November 18, 2018, http://features.thecrimson.com/2016/senior-survey/post-harvard/; Office of Career Strategy, First Destination Report: Class of 2016 (2016), http://ocs.yale.edu/sites/default/files/files/OCS%20Stats%20pages/Public%20-%20Final%20Class%20of%202016%20Report%20(6%20months).pdf. The most recent figures for Princeton, which are from the class of 2015, indicate that 32.6 percent of the class will go into finance, insurance, and “professional, scientific, and technical services,” a category that includes consulting groups. See Career Services at Princeton University, Annual Report: 2014–2015 (2015), https://careerservices.princeton.edu/sites/career/files/Career%20Services%20Annual%20Report%202014-15.pdf [inactive]. See also Catherine Rampell, “Out of Harvard, and into Finance,” New York Times, December 21, 2011, accessed November 18, 2018, https://economix.blogs.nytimes.com/2011/12/21/out-of-harvard-and-into-finance/?_r=1 (citing figures of 35.9 percent in 2010 and 46 percent in 2006 from the Princeton Office of Career Services data).

  Astonishingly, these shares used, before the financial crisis, to be greater still. In 2007, 43 percent of Princeton’s graduating class with full-time jobs entered finance. See Posner and Weyl, “Against Casino Finance.”

  (more than goes to work in any other sector): See Fraser, Every Man a Speculator, 552; Harvard Business School, “Recruiting: Data & Statistics,” accessed October 22, 2018, www.hbs.edu/recruiting/data/Pages/detailed-charts.aspx.

  falling proportion of the overall workforce: Between 1947 and 1977, finance’s shares of GDP and total employment grew together, from 2.32 percent (GDP share) and 2.25 percent (employment share) to 4.55 percent (GDP share) and 4.12 percent (employment share). Then, from the 1980s onward, finance’s share of GDP accelerated its growth, rising to 7.69 percent by 2005, even as finance’s employment share flattened and indeed began gently to decline, peaking at 4.64 percent in 1987 and falling to 4.32 percent by 2005. These numbers include insurance in finance but exclude real estate. GDP share is computed as the ratio of nominal value added by the finance sector to the nominal GDP of the United States. These data are obtained from the Annual Industry Accounts, published by the Bureau of Economic Analysis. Relative education is computed as the share of hours worked by employees with at least a college degree in the financial sector minus the corresponding share of hours in the rest of the private sector. These data are obtained from the March Current Population Survey (CPS), which is published monthly by the Census Bureau.

  See Philippon and Reshef, “Skill Biased Financial Development,” 3–6 (pointing out that the changes that they document are driven by a rebalancing of the financial sector’s various subsectors, so that traditional banking has declined relative to other aspects of finance and in particular investment). For a different view, see Thomas I. Palley, “Financialization: What It Is and Why It Matters,” Levy Economics Institute Working Paper no. 525, December 2007, http://www.levyinstitute.org/pubs/wp_525.pdf (using data from the 2007 Economic Report of the President). For finance’s share of employee compensation, see David A. Zalewski and Charles J. Whalen, “Financialization and Income Inequality,” Journal of Economic Issues 44, no. 3 (2010), 767–77, reporting on Philippon and Reshef, “Skill Biased Financial Development.”

  higher in finance than in any other sector: Harvard Business School, “Recruiting: Data & Statistics,” accessed on October 22, 2018, www.hbs.edu/recruiting/data/Pages/detailed-charts.aspx.

  make literally billions of dollars a year: Dierdre Bolton, “Hedge Fund Billionaires: Who’s Making the Most?,” Bloomberg via YouTube, April 15, 2013, accessed November 18, 2018, www.youtube.com/watch?v=gP5JU9ZKt-M.

  about 100 percent per year: Cappelli, The New Deal at Work, 57, citing Sumner H. Slichter, The Turnover of Factory Labor (New York: D. Appleton & Co., 1919), 375.

  each individual rock face: For support for these claims, see Cappelli, The New Deal at Work, 51–53.

  to be manufactured by others: Cappelli, The New Deal at Work, 51.

  virtually no managers at all: Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Belknap Press of Harvard University Press, 1977). Hereafter cited as Chandler, The Visible Hand.

  selling their labor power as employees: This formulation loosely follows Cappelli, The New Deal at Work, 51–57.

  or quality control: Cappelli, The New Deal at Work, 51–53, quoting Chandler, The Visible Hand, 3.

  had not y
et been invented: The telephone was invented in 1876. The vertical filing cabinet was invented in 1895. The modern computer was not invented until the middle of the twentieth century.

  the Singer sewing machine company: Cappelli, The New Deal at Work, 56.

  that the firm sought: Cappelli, The New Deal at Work, 56, citing Daniel Nelson, Managers and Workers: Origins of the New Factory System in the United States, 1880–1920 (Madison: University of Wisconsin Press, 1975), 35.

  management of industrial firms: Andrew Hill, “What Is a Manager’s Role in a Human-Robot World?,” Financial Times, May 5, 2016, accessed November 18, 2018, www.ft.com/content/f619036a-0612-11e6-9b51-0fb5e65703ce.

  a third of the U.S. private-sector workforce: James T. Bennett and Bruce E. Kaufmann, The Future of Private Sector Unionism in the United States (London: Routledge, 2015), 4–5. Only a tenth of workers belong to unions today (2016 figures). The share of private-sector workers to belong to unions in 2016 was even lower—6.4 percent. See Bureau of Labor Statistics, “Union Membership Rate 10.7 Percent in 2016,” February 9, 2017, accessed October 22, 2018, www.bls.gov/opub/ted/2017/union-membership-rate-10-point-7-percent-in-2016.htm.

  “industrial self-government”: United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 581 (1960).

  an alternative control center: In 1947, 35 percent of U.S. private-sector workers belonged to unions; by 2006, only 7.4 percent did. See Barry Hirsch, “Sluggish Institutions in a Dynamic World: Can Unions and Industrial Competition Coexist?,” Journal of Economic Perspectives 22, no. 1 (2008): 155.

  “what was good for the country”: Wilson had been nominated by President Dwight Eisenhower to serve as secretary of defense and made this remark in response to a question in his confirmation hearing about whether he would be able to put the interests of the United States before those of General Motors. See “Charles E. Wilson,” Department of Defense Historical Office, accessed October 22, 2018, https://history.defense.gov/Multimedia/Biographies/Article-View/Article/571268/charles-e-wilson/.

  “Great Ideas of Western Man”: The print series was inaugurated in 1950–51 and ran through 1975. Artists including Ben Shahn, Alvin Lustig, René Magritte, Lester Beall, and Saul Bass created original works representing ideas from Aristotle, Kant, Rousseau, and Freud, among others. See Neil Harris and Martina Roudabush Norelli, Art, Design, and the Modern Corporation: The Collection of Container Corporation of America, a Gift to the National Museum of American Art (Washington, DC: Smithsonian Institution Press, 1985).

  “the ads in this series convey”: Tom Wolfe, “Advertising’s Secret Messages,” New York Magazine, July 17, 1972, 23.

  only about sixteen thousand employees: Douglas MacMillan and Telis Demos, “Uber Valued at More Than $50 Billion,” Wall Street Journal, July 31, 2015, accessed November 18, 2018, www.wsj.com/articles/uber-valued-at-more-than-50-billion-1438367457; “Uber Newsroom, Company Info,” Uber, accessed October 22, 2018, www.uber.com/newsroom/company-info/.

  never met middle management: Min Kying Lee et al., “Working with Machines: The Impact of Algorithmic and Data-Driven Management on Human Workers,” Proceedings of the 33rd Annual ACM Conference on Human Factors in Computing Systems (April 2015): 1603, www.cs.cmu.edu/~mklee/materials/Publication/2015-CHI_algorithmic_management.pdf.

  every assembly line: For a broad overview of modern supply chain management, see generally Martin Christopher, Logistics and Supply Chain Management, 5th ed. (Harlow: Pearson, 2016), 35 (discussing how “just-in-time” strategy results in minimal inventory), 194 (the use of event management software to manage inventory levels), 225–26 (discussing the merits of Six Sigma management techniques), 289 (a change-embracing corporate culture). For in-depth case studies of Walmart’s and Amazon’s supply chains, see Colby Ronald Chiles and Marguarette Thi Dau, “An Analysis of Current Supply Chain Best Practices in the Retail Industry with Case Studies of Wal-Mart and Amazon.com” (master’s thesis, Georgia Institute of Technology, 2005), 66, 70, 103–4 (discussing both companies’ culture of innovation, including Walmart’s “Everyday Low Prices” mentality and its managers’ autonomy and incentives to keep costs low).

  before the mid-1980s: Cappelli, The New Deal at Work, 115–16. Note that Cappelli excepts “reductions in force caused by technological developments” or “sharp decline[s] in business” from this rule.

  express “no layoff” policies: According to “The 100 Best Companies to Work for in America,” in 1993 ten had “no layoff” policies; by 1997 only two did, and only one of the two was a public company. See Cappelli, The New Deal at Work, 115.

  “layers of bureaucrats reporting to bureaucrats”: See Carl Icahn, “Leveraged Buyouts: America Pays the Price; The Case for Takeovers,” New York Times Magazine, January 29, 1989 (quoted in Adam Goldstein, “Revenge of the Managers: Labor Cost-Cutting and the Paradoxical Resurgence of Managerialism in the Shareholder Value Era, 1984 to 2001,” American Sociological Review 77, no. 2 (2012): 273, hereafter cited as Goldstein, “Revenge of the Managers”). Goldstein adds that Icahn attributed Japan’s then-greater manufacturing productivity growth to “our lack of managerial talent and the strangling bureaucracy that exists in most of corporate America.”

  from 1:5 to 1:30: See Rosemary Batt, “From Bureaucracy to Enterprise? The Changing Jobs and Careers of Managers in Telecommunications Service,” in Broken Ladders: Managerial Careers in the New Economy, ed. Paul Osterman (New York: Oxford University Press, 1996), 55–80; Goldstein, “Revenge of the Managers,” 273.

  twice the rate of nonmanagerial workers: Managerial displacement rates roughly doubled over these decades (even as displacement rates for nonmanagerial workers declined). See Jennifer Gardner, “Worker Displacement: A Decade of Change,” Monthly Labor Review 118 (1995): 45–57; Goldstein, “Revenge of the Managers,” 273. White-collar and management employees bore disproportionate shares of the displacements, accounting for only 40 percent of jobs but between 60 and 75 percent of jobs cut. See Cappelli, The New Deal at Work, 117–19, Figure 4-2; Goldstein, “Revenge of the Managers,” 273. See also American Management Association, 1998 AMA Survey on Job Creation, Job Elimination, and Downsizing (New York: American Management Association, 1998) and American Management Association, 1994 AMA Survey on Downsizing: Summary of Key Findings (New York: American Management Association, 1994), 2, which found that the hundred largest companies in the United States have seen 22 percent of their workforce laid off since 1978, with 77 percent of those cuts targeted at white-collar jobs.

  between 1987 and 2006: Paul Osterman, The Truth About Middle Managers: Who They Are, How They Work, Why They Matter (Cambridge, MA: Harvard Business Press, 2009), 54, Table 3-3. Hereafter cited as Osterman, The Truth About Middle Managers.

  “not [to] automat[e]”: Sarah O’Connor, “When Your Boss Is an Algorithm,” Financial Times, September 8, 2016, accessed November 18, 2018, www.ft.com/content/88fdc58e-754f-11e6-b60a-de4532d5ea35. Hereafter cited as O’Connor, “When Your Boss Is an Algorithm.”

  unprofitable firms: See Dirk Zorn et al., “Managing Investors: How Financial Markets Reshaped the American Firm,” in The Sociology of Financial Markets, ed. Karin Knorr Cetina and Alex Preda (New York: Oxford University Press, 2005), 269–89; Goldstein, “Revenge of the Managers,” 271.

  Managers were more likely to be downsized in heavily unionized firms (where the management function spread deeper into the nominally production workforce). See William Baumol, Alan Blinder, and Edward Wolf, Downsizing in America: Reality, Causes, and Consequences (New York: Russell Sage Foundation, 2003); Goldstein, “Revenge of the Managers,” 271.

  booms as well as busts: Bureau of Labor Statistics, “Industrial Production Managers,” Occupation Outlook Handbook, 2016–17 Edition, December 17, 2015. The BLS statistics show the number of industrial production managers falling more or less consistently from 208,000 in 1997 to 183,050 in 2001 to 143,310 in 2010. While there has been a slight
resurgence since then to 168,400 in 2016, the BLS projects a 4 percent decline in the occupation over the next ten years.

  in the 1990s: Lori Kletzer, “Job Displacement,” Journal of Economic Perspectives 12, no. 1 (Winter 1998): 118; Peter Cappelli, “Examining the Incidence of Downsizing and Its Effect on Organizational Performance,” in On the Job: Is Long-Term Employment a Thing of the Past?, ed. David Neumark (New York: Russell Sage Foundation, 2000), 463–516; Goldstein, “Revenge of the Managers,” 271.

  The share of layoffs caused by corporate restructurings as opposed to economic losses nearly tripled. See Osterman, The Truth About Middle Managers, 45, citing Kevin Hallock, “A Descriptive Analysis of Layoffs in Large U.S. Firms Using Archival Data over Three Decades and Interviews with Senior Managers,” working paper, Cornell Industrial and Labor Relations School, Ithaca, NY, August 2005, https://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1238&context=articles. According to the American Management Association, 1994 AMA Survey on Downsizing: Summary of Key Findings (New York: American Management Association, 1994), 2, 66 percent of job cuts were due to restructuring (as compared to just 23 percent due to outsourcing). See also Cappelli, The New Deal at Work, 116–17.

  to under one-sixteenth today: See Bureau of Labor Statistics, “Union Membership Rate 10.7 Percent in 2016,” February 9, 2017, accessed October 22, 2018, www.bls.gov/opub/ted/2017/union-membership-rate-10-point-7-percent-in-2016.htm.

  advanced inside the company: Cappelli, The New Deal at Work, 140; Aaron Bernstein, “At UPS, Part-Time Work Is a Full-Time Issue,” Business Week, June 16, 1997, 88–90.