Friday, April 7, 2017

HBR: Corporations in the Age of Inequality — Inequality isn’t just about individuals — it’s risen between companies, too.

From the Harvard Business Review, March 2017:
On a sunny morning in December 2013, as Google employees boarded the bus that would take them on their daily commute from Oakland to the company’s Mountain View headquarters, protesters moved in. One unfurled a bright blue banner bearing the words “F— Off, Google.” Some handed out pamphlets explaining their anger: “While you guys live fat as hogs with your free 24/7 buffets, everyone else is scraping the bottom of their wallets, barely existing in this expensive world that you and your chums have helped create.” News outlets reported that people had thrown rocks and a bus window had been smashed.

Across the bay in San Francisco, Apple employees filing onto their own shuttle encountered a similar demonstration. There were several protests that winter, most attended by just a few dozen activists. Nonetheless, that was enough for Google to beef up security, and for one Googler to tweet from a bus surrounded by protestors that he and his coworkers were “under siege.” A protestor countered, “We’re here to send a message to the rich tech companies that their business has ramifications and consequences.”

The so-called Google bus protests failed to capture the national imagination the way Occupy Wall Street had two years earlier. The demonstrations were far smaller and seen as a mostly local phenomenon — one region’s reaction to rising rents and urban gentrification. But the episode highlighted an economic trend that the Occupy movement missed and that deserves wider attention.

What the bus protesters understood — and what new research demonstrates — is that there’s more to income inequality than the 1% versus the 99%, CEOs versus typical workers, or the finance sector versus the rest of the economy. There’s more to it than skilled versus unskilled workers, although skills account for a lot. The real engine fueling rising income inequality is “firm inequality”: In an increasingly winner-take-all or at least winner-take-most economy, the best-educated and most-skilled employees cluster inside the most successful companies, their incomes rising dramatically compared with those of outsiders. This corporate segregation is accelerated by the relentless outsourcing and automation of noncore activities and by growing investment in technology. It’s no accident that a company like Google became a flashpoint for controversy; its employees fare much better than workers almost anywhere else.

Of course, some say that income inequality is not a problem, but even in the business world their ranks are shrinking. In a 2015 survey, 63% of Harvard Business School alumni said that reducing economic inequality should be a high or very high priority for American society; only 10% said it should not be a priority at all. The Brexit vote and the recent U.S. presidential election shined a spotlight on the ways in which income inequality is giving rise to a global populism that threatens to destabilize governments and economies around the world.

If we want to truly understand income inequality — if we want to mitigate it and its pernicious effects — we must look beyond CEO compensation and tax policy and consider the role played by firms and their hiring and compensation policies for ordinary, non-millionaire workers. This is not a simple morality play in which evil companies are pitted against the middle class. There is nothing nefarious about Google’s goal of being the global leader in software and machine learning, or in its hiring the best employees it can find. Yet the result of countless strategic decisions in pursuit of such goals by Google and other elite companies throughout the world — not just in tech — has been to raise the compensation of some workers far more than others.
It’s time to turn our attention from comparing individuals’ fortunes to considering differences between firms.

Let’s start with a review of what most people already know about the inequality debate, even if they haven’t read all 704 pages of Thomas Piketty’s runaway best seller, Capital in the Twenty-First Century.

Since 1980, income inequality has risen sharply in most developed economies, especially in the United States. Much of the public discourse has focused on the gap between the top 1% and everybody else. In 1980, the top 1% of adult earners in the U.S. made $420,000 a year, on average (before taxes and measured in 2014 dollars) — 27 times as much as the average for the bottom 50% of earners. Today the top 1% of earners make an average of $1.3 million a year — 81 times as much as the average for workers in the bottom half. (See the exhibit “Inequality Between Individuals Has Risen.”)
But it’s not just the top 1% who are pulling away. The gap between workers with a college education and ones with only a high school diploma has increased dramatically as well. In 1979, the average annual salary for American men with a college degree was $17,411 higher (after adjusting for inflation) than the average for men with a high school degree. By 2012, the gap had nearly doubled, to almost $35,000; the gap between women with college degrees and those with high school diplomas nearly doubled as well.

Meanwhile, the bottom half of earners in the U.S. have seen virtually no growth in earnings, before taxes and social-security transfers, despite a rise in the number of hours worked. The problem of stagnant incomes for this group is not sluggish GDP growth, as is often suggested; the U.S. economy produces far more each year than it did decades ago. What matters more, a study by Raj Chetty and colleagues demonstrates, is rising income inequality. Their research shows that only half the workers born in 1980 — today’s 36-year-olds — make as much money as their parents did at the same age.

When the researchers ran simulations testing the effects of diminishing GDP growth versus rising income inequality on wage stagnation, the percentage of 36-year-olds who did better than their parents jumped to 80% when income inequality was held steady, but only 60% did better when GDP growth was restored to the older, faster rate.

But that’s not the whole story. Over the past several years, economists have begun to examine pay gaps between and within firms to see how company strategy and corporate trends affect the broader rise of inequality. The findings from this new area of study are striking and help explain why incomes have risen so much for some and not at all for others. They also explain why so many executives, managers, and other well-paid workers have failed to notice the growing disparity.

Companies can contribute to rising income inequality in two ways. As we’ve just discussed, pay gaps can increase within companies — between how much executives and administrative assistants are paid, for example. But studies now show that gaps between companies are the real drivers of income inequality. Research I conducted with Jae Song, David Price, Fatih Guvenen, and Till Von Wachter looked at U.S. employers and employees from 1978 to 2013. We found that the average wages at the firms employing individuals at the top of the income distribution have increased rapidly, while those at the firms employing people in the lower income percentiles have increased far less. (See exhibit “Inequality Between Companies Is Also Growing.”)

In other words, the increasing inequality we’ve seen for individuals is mirrored by increasing inequality between firms. But the wage gap is not increasing as much inside firms, our research shows. This may tend to make inequality less visible, because people do not see it rising in their own workplace....MUCH MORE
Two quick points:
Regarding the Google Bus protests, one of the reasons the story didn't get any traction was because the media didn't push the story. I don't know why that would be, some have speculated it wasn't pushed because the target was the GOOG, or it didn't fit the narrative or it was on the wrong coast. Who knows?

We had a few posts:
"BREAKING: Protesters attack Google bus in West Oakland, smashing window"
"Kleiner Perkins founder says Silicon Valley elite are being treated like Jews in Nazi Germany"
Kleiner Perkins Founder Says Google Bus Protests NOT Like Kristallnacht; Firm Denies Knowing Mr. Perkins
"A Guide to What the Hell Is Up With Silicon Valley Right Now" (the future is Pittsburgh)

But overall the coverage was nothing like Occupy. Who can forget that autumn of 2011?
North Korea Comments on #OccupyWall Street
China and GE's Immelt Sympathise with #OccupyWallStreet
Can't stop laughing, hypoxia encroaching, may black out....
...Sooo... China is down with protesting, just not in Tiananmen...  
Today in #OccupyWallStreet News: "I'm a F***ing Journalist, You Motherf***er!
#OccupyRedSquare Doesn't Go at All Well (Warning: Viktor Chernomyrdin Moment AHEAD)
#OccupySesameStreet Turns Violent
Breaking--From the #OccupySesameStreet Protests: "Three Die After The Electric Company Privatized"--Breaking 
Some Thoughts on the #OccupySesameStreet Protests
Ayatollah Khamenei says Occupy Wall Street could mark the fall of the west
Michael "I'm Part of the 99%" Moore Heckled at #Occupy Rally
Mr. Moore's net worth is estimated at $50,000,000.
I Don't Think the Globe and Mail is Taking #OccupyToronto Seriously
We Will NOT Be Co-opted: "Luxury Ice Cream Unit of Multinational Unilever Endorses #OccupyWallStreet
#OccupyWallStreet: The Revolution Will be Televised (and trademarked)
#OccupyWallStreet Proclaims Victory, Announces Plan to Re-launch #OccupyMom'sBasement
Don't get me wrong, I'm as much into anarcho-capitalism as the next guy, I think I'd do pretty well whatever the ground rules.
It's just that #OWS isn't showing the kind of higher-level cognitive abilities you'll find at, say, MI-6...

Now where was I? Commenting on the HBR?
Yes, yes. point two: The Review article stresses the Winner take most/Winner take all economy as a huge factor and I couldn't agree more. From last month's "ICYMI: What's The Actual Cash Value Of Data Collection?":
...Much more important than the direct monetization of big data is the strategic advantage it can bestow over time.
In a winner-take-all economy as in a horse race, small differences in superiority are rewarded all out of proportion to the actual advantage. A top thoroughbred may only be a couple fifths of a second faster than the field but those two lengths over the course of a season can mean triple the earnings for #1 vs. #2.
In commerce the results can be even more dramatic because rather than the 60%/20%/10% purse structure of the racetrack the winning vendor will often get 100% of a customer's business.
We'll probably have more on the phenomena and I will resist the siren song of linking to the rest of the #OWS posts:

Totally me, not Ulysses, and the Sirens