CEPR

CENTER FOR ECONOMIC AND POLICY RESEARCH

Future of the Firm: Implications for the Future of Work

Eileen Appelbaum
Co-Director
Center for Economic and Policy Research

March 8, 2018
 Overview of Presentation
• From Managerial to Financial Model of the Firm
– Private equity is the most extreme form of the financial firm
– Market concentration, pricing power, decline in labor’s share

• Employers No Longer Need Relationship with Workers

– Employers don’t want to be employers anymore
– Domestic outsourcing
• Role of technology
– Increasing wage inequality

• Monopoly and monopsony

– Bargaining power and stagnant wages
– Healthcare in the US

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Managerial Model of the Firm
• Key assumptions
– Value is created, extracted, distributed through labor process
– Firms make profit by producing goods and services
– Retained earnings reinvested to improve productivity and profitability and
to expand market share
– Managers need labor peace and a productive workforce willing to
participate in production
– Achieve this via negotiating wages that allow workers to share in gains
from productivity growth
– Rising wages => increased demand =>expanding market for firms’
products => increased employment =>virtuous circle

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 From Managerial to Financial Model of Firm
• Deregulation set stage for raw extraction of profit, rent
– Financial deregulation, including pensions
– SEC allows companies to buy back own stock
– Lax enforcement of tax laws
– Expansion of patent and copyright protection
– Changed focus of anti-trust policy
• Increased market concentration
• Rise of platform monopolies
• Market concentration, rent extraction => decline in labor’s share
• Principal-Agent Model
– Maximization of shareholder value

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Financial Model of the Firm
• Success of firm = creation of value for shareholders
• Firms extract profit and rent via financial activities that have little to
do with producing goods and services
– Buy and sell companies or divisions (M&A), sell off assets
– Use excessive amounts of debt to enhance profits
– Adopt fee generating activities
– Use retained earnings to buyback shares, increase dividends
– Aggressive use of tax avoidance and arbitrage

• Labor process less important

– Labor an input like any other: utilize efficiently, minimize cost
• Private Equity is extreme version of shareholder maximization

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CENTER FOR ECONOMIC AND POLICY RESEARCH
The house
always wins…

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Case: Toys ‘R US
• July 2005 LBO - 3 PE funds sponsored by Bain, KKR, Vornado
– Before:
• Debt = $1.86 B, Equity = $4.30 B, Enterprise value = $6.16 B
• 30% debt, 70% equity – typical of publicly traded companies
– After:
• Debt = ~$5.2 B, Equity = 1.4 B, Enterprise Value = $6.6 B
• 78% debt, 22% equity – vulnerable to financial distress
• Each PE fund put in $433 M – Bain $43 M, KKR & Vornado $8.5 M each
• September 2017 – Toys ‘R US declares bankruptcy
– Losers:
• Hundreds of stores closed, thousands of workers lost their jobs
• Pension funds, other PE investors wiped out; lenders take haircut
– PE firms? Each collected $61M monitoring fees; KKR & Vornado 58% to LPs
• Bain made $61 - $43 = $18M; KKR & Vornado each $24 - $8.5 = $15.5M

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Relationship with Labor No Longer Needed

• Different logic of profit, wealth creation in financialized firm

– Success of executives not tied to firm’s long term sustainability but to
stock prices
• Labor just another commodity – but comes with liabilities
– EPL, work-family, wage demands, health and pension benefits
– Lead firms want to move as many workers as possible off their payrolls
– Rent seeking is rampant among lead firms
– Global supply chains, precarious employment (temp help, independent
contractors)
– Domestic outsourcing, inter-firm contracting, production networks

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Domestic Outsourcing
• More extensive than offshore outsourcing
– Often characterized by a lead or core firm that has pricing power, captures
rents, dominates a network of contract or supplier companies
– Lead firm can extract the value added – rents and more – created by network
of firms that create the final good or service
– Employment shifted from lead firm to other firms in network
– Weak firms face narrow profit margins, lack ability to pay workers fairly
– Note: contract company workers don’t appear as ‘precarious workers’

• To labor-capital competition over distribution of value added, now

add capital-capital competition among firms in network
• Worker’s pay depends on own skills AND employer’s position in
network =>rising inequality among worker with similar skills

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CENTER FOR ECONOMIC AND POLICY RESEARCH
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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Digital Technology
• Information, computation and communication technologies
• Operates at two levels:
– At level of organization of production (allocation of parts of the production
process within/across firms)
– At level of organization of work (allocation of work tasks among workers, labor
content of those tasks –computers, robots, AI, machine learning)
• Facilitates decentralization of production & distribution
– Lowers previously high transaction costs
• Monitoring vendors, suppliers, franchisees
• Coordination and integration of production processes
• Undercuts rationale for vertically integrated firm
– Profound effect on firm boundaries, on employment relations (Who’s the
boss?)

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Market Concentration:
Monopoly/Monopsony
• US economy characterized by increased market concentration and
decentralization of goods production & service delivery

• Few firms in industry=>lead firms can raise price, capture

monopoly rents

• If market concentration occurs within geographic region, may also

imply ability to hold down workers’ wages in that region

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Case: U.S. Healthcare
• Healthcare restructuring - consolidation of hospitals into larger
healthcare systems, decentralization of healthcare services to
outpatient care settings
– Typical U.S. region has 3-5 consolidated health systems
– Care moving from hospitals to clinics and a wide range of outpatient
(ambulatory) care facilities
• Decentralization of services has few historical precedents
• Drop in union density in outpatient care centers
– Associated with higher prices, worse quality outcomes
– Digitalization has facilitated both organizational consolidation and
decentralization of care
• Rapid employment increase over last decade, rise in education, no
increase in p-t, immigrant, share of young workers
• Despite this, declining real wages

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 What Explains Stagnant Wages in HC?
• Wages of nonprofessional workers flat, lower in outpatient than
hospitals
• Administrative rules, norms in large hospitals may compress
wage differences between occ groups, raise pay of
nonprofessional workers
• Union density among non-professional employees has fallen,
particularly in outpatient settings
• As healthcare systems have consolidated, monopoly power =>
higher prices
• Does increased bargaining power of employers => lower wages

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CENTER FOR ECONOMIC AND POLICY RESEARCH
 Future of Firm Poses Challenges for
Workers
• Wages of nonprofessional workers flat, lower in outpatient than
hospitals
• Administrative rules, norms in large hospitals may compress
wage differences between occ groups, raise pay of
nonprofessional workers
• Union density among non-professional employees has fallen,
particularly in outpatient settings
• As healthcare systems have consolidated, monopoly power =>
higher prices
• Does increased bargaining power of employers => lower wages

CEPR
CENTER FOR ECONOMIC AND POLICY RESEARCH