1. 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

2. 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 investments o Use of stock buy-backs to boost short-term stock prices Related developments have affected structure of labor markets with profound implications for workers.

3. Impacts on Labor Markets, Implications for Workers: Overview Changes in structure of labor markets—several mechanisms 1. 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 workers o Decline in quality of jobs—as measured by compensation, job security o Less training, investments in human capital

4. Decline of Vertically Integrated Firms Large integrated firms have sliced up the value chain o Shed low value, low profit components of business o Still control the supply chain—often complex network of domestic & global suppliers o 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 phenomenon o Growth of “factoryless goods producers”

5. Decline of Vertically Integrated Firms: Implications Implications for workers o Large integrated firms historically paid high wages—workers shared in profits o Slicing up of the value chain Downward pressure on compensation for workers in competitive supplier markets Examples: o Tech firms like Apple o Retail chains like Walmart o Franchise model

6. 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 agency o Other contract company workers – hired through 3 rd 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 benefits o Lower workers’ compensation (disability insurance), unemployment insurance costs o Screen workers for permanent positions

7. Staffing Practices: Use of Contract Workers Implications for workers o Often lower compensation, especially on benefits o Lower job security – shifts economic risk onto workers o Some concerns over worker safety – inadequate training when “joint employer” relationships o 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 increasing o 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

8. 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

9. 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

10. HR Practices: Layoffs and Tenure Layoffs o 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 1980 o 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

11. 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)