Large corporate buyers may be the hidden culprit behind stagnant wages – Nathan Wilmers

MIT Sloan Assistant Professor Nathan Wilmers

From LSE USAPP

Slow wage growth since the Great Recession has been puzzling. As the economic recovery has clocked eight years of growth, unemployment has dropped, but real median wages have barely increased. Commentators have looked for explanations in everything from the rise of artificial intelligence to the scarring effects of the decade-old economic crisis. However, slow US wage growth has a longer history. Relative to the rapid growth marking the post-World War II period, median real wages have grown little since the 1970s (except for the economic boom of the late 1990s).

A growing body of research points to the decline in worker bargaining power as a core explanation. The long membership decline of labor unions has made it harder for workers to demand higher pay. In some local labor markets, increased market concentration has left few employers able to dictate terms to workers. The real federal minimum wage has slipped by around 30 percent from its peak in the late 1960s.

In recent research, I found another, more subtle reason why worker bargaining power has declined. When workers bargain over wages with employers, it is not just their clout vis-a-vis their immediate employer that matters. A combination of rising outsourcing and consolidation of large buyers has left more and more workers employed at companies dependent on a few outside buyers for sales revenue. These large buyers can effectively pressure suppliers to reduce wages: If buyers demand price and cost-cutting, often suppliers pass these pressures along to their workers.

These buyers do not see or meet their suppliers’ workers. This social distance means large buyers can ignore the fairness norms and social pressure that would otherwise raise workers’ pay. For example, when companies outsource janitorial or security workers, these outsourced workers face slower wage growth.

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Raising wages is the right thing to do, and doesn’t have to be bad for your bottom line – Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

From Harvard Business Review 

The “working poor” are a growing problem in America — one that is increasingly embarrassing to the corporate elite. Business leaders who are morally inclined to do the right thing should and can play a stronger role in solving this problem by raising wages to a level where their employees’ earnings cover the cost of living.

Jamie Dimon, CEO of JPMorgan Chase, was recently stumped in a U.S. House Financial Services Committee hearing when California Congresswoman Katie Porter asked him what advice he could give to a constituent — one of his own bank’s tellers, who makes $2,425 a month and lives with her daughter in a one-bedroom apartment with a $1,600 rent in Irvine. Food, utilities, childcare, and commuting cost about another $1,400, leaving her $567 short every month. Dimon had no good answer.

Yet Dimon is one of a number of corporate leaders — others include Warren Buffett, Ray Dalio, and Paul Tudor Jones — who have expressed public concern that the version of capitalism that has allowed them to be so successful is not sustainable for our society. The data are daunting. Between 1980 and 2014, while the pre-tax income doubled for the top 1% and tripled for the top 0.1%, there was little change for the bottom 50%. In 2017, more than 45 million Americans worked in occupations whose median wage was below $15 an hour. Although wages increases have finally been accelerating, 40% of Americans are living so close to the edge that they cannot absorb an unexpected $400 expense—not much, as car repairs or dental work go.

For business leaders operating in settings like that of JPMorgan Chase, where profit margins are high and low-wage employees are a small driver of overall costs, doing the right thing morally is not even that risky. Some wage increases would even pay themselves by increasing productivity and reducing turnover — employees would be more motivated, less distracted with life problems, and less eager to find a better job. For those leaders compelled by the same moral argument but operating in businesses with low profit margins and a high percentage of low-wage employees, doing the right thing morally is still possible. But it requires a lot more work.

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Closing the lending gap will help government and business thrive – Doug Criscitello

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy

From The Hill

With taxpayers at risk for $20 trillion in loans and insured obligations, worth more than the five largest American bank companies combined, the United States government is essentially the largest financial institution in the world. Lending is a risky business as we learned during the last financial crisis. Government activities in this regard are no less dangerous, and perhaps more so, given public policy complexities that extend well beyond profit. Given a bleak fiscal outlook, policymakers may want to consider ways to reduce taxpayer exposure by fortifying financial institutions and financial technology companies with an enormous infusion of loan performance data that only it can provide.

Through a set of more than 100 programs largely initiated or expanded in response to the Great Depression, the Great Society programs of the 1960s, and the 2008 financial crisis, the government has provided over 100 million direct loans and guarantees for home ownership, higher education, business assistance, and a variety of other purposes. As the government has increasingly turned to credit programs to accomplish a diverse set of objectives, with its loan portfolio more than doubling since 2008, it is challenged to keep pace with an increasingly sophisticated financial marketplace, which could actually help reduce the federal lending role.

Government forays into this realm are typically driven by a desire to extend the lending frontier, thereby achieving societal gains, by either closing information gap about borrower creditworthiness or by providing an explicit subsidy to borrowers who likely would not be granted a loan even if a private lender had full information. The government can increase credit availability under either of those conditions because, unlike private lenders, it is able to offer loans without regard for profit. Read More »

The hidden culprit behind stagnant wages – Nathan Wilmers

MIT Sloan Assistant Professor Nathan Wilmers

From The Hill

Slow wage growth since the Great Recession has been puzzling. As the economic recovery has clocked eight years of growth, unemployment has dropped, but real median wages have barely increased.

Commentators have looked for explanations in everything from the rise of artificial intelligence to the scarring effects of the decade-old economic crisis.

However, slow U.S. wage growth has a longer history. Relative to the rapid growth marking the post-World War II period, median real wages have grown little since the 1970s (except for the economic boom of the late 1990s).

A growing body of research points to the decline in worker bargaining power as a core explanation. The long membership decline of labor unions has made it harder for workers to demand higher pay.

Read More »

The links between stagnating wages and buyer power in U.S. supply chains – Nathan Wilmers

Nathan Wilmers, Assistant Professor, Work and Organizational Studies

From Washington Center for Equitable Growth 

Stagnating wages among U.S. workers since the 1970s is well-documented. Also well-known is the outsized—and still growing—market impact of a small number of giant retailers such as Amazon.com Inc and Walmart Inc. What is less known is whether these two trends are linked.

In research I’ve been conducting—detailed in an article recently published in the American Sociological Review—I’ve found that increased pressure from large corporate buyers decreases wages among their suppliers’ workers. The growing influence of these buyers on workers’ wages is significant enough that it accounts for around 10 percent of wage stagnation since the 1970s. My findings show how shifts in market power have affected workers’ wage growth.

Relative to the postwar economic boom, U.S. workers’ pay growth has slowed by around one-half since the 1970s. During that same period, market restructuring has shifted many workers into workplaces heavily reliant on sales to outside corporate buyers. Large retailers such as Walmart and Amazon wield increasing power against manufacturing suppliers and warehousing and shipping contractors. When this happens, big corporate buyers are able to demand lower prices for the goods and services they are buying, and suppliers and contractors must sell at lower prices and try to cut costs. Likewise, companies increasingly outsource noncore functions, including food service, janitorial, and security jobs, a phenomenon known as the fissured workplace. The result is that more and more workers are employed by intermediate employers, which in turn rely on sales to outside corporate buyers.

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