Organizations, institutions, and inequality Jerry Davis The University of Michigan 12 May 2016

Where I am going to end up:

•  A proximal cause of national income inequality is the “demography” of employing organizations in an economy –  Most people derive most of their income from

employment by organizations –  The morphology of organizations (size, levels of

hierarchy, promotion ladders) ~determines income distributions

•  A distal cause is the institutional ecosystem that shapes how organizations are structured

•  This stuff is changing, and it won’t be pretty

How sociologists have studied inequality (cartoon version)

•  Individuals (1960s-1970s): what accounts for individual socio-economic attainment? –  Typical study: self-reported income = f(sex, race, education,

occupation, mother’s education); latter variable represents “inter-generational transmission”

–  Critique: attainment happens within organizations, not in “society” (e.g., Baron & Bielby, 1980)

•  Organizations (1980s-2000s): what explains variation in hiring practices and career ladders in organizations? –  Typical study: compare ILMs or prevalence of women/minorities

in management across firms –  Critique: too coarse-grained; insufficient data

How sociologists have studied inequality (cartoon version)

•  Institutions (now): how do institutional configurations shape income and mobility within and across organizations? –  How do cities’ politics, norms, business cultures, and elite

networks influence occupational segregation and attainment? (Stephens, 2013)

–  How do national institutions shape what a “corporation” is and how it affects income inequality? (Cobb and Davis, ongoing…)

HOW CAN ORGANIZATIONS “CAUSE” INEQUALITY?

The paradox of inequality and corporate size

Employment concentration = Surprising finding: there is a very high correlation between

employment concentration using the 10 biggest firms and using the 25, 50, or 100 biggest firms in the US.

The corporate “tendency toward gigantism” is evident even with a relatively thin slice of data.

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Number of workers employed by n largest firms Total labor force

U.S. income inequality and 10-firm employment concentration, 1950 - 2008

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3236

4044

48Gi

ni Co

effici

ent

02

46

8

Ratio

of T

op 1

0 Em

ploye

rs to

Lab

or F

orce

1950 1960 1970 1980 1990 2000 2010Year

Employment Concentration Income Inequality

r = -.89

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Income inequality and employment concentration by year, 1950 – 2006

1950

19511952

1953

1954

1955

19561957

1958

1959 1960

1961

19621963 1964

1965

1966

1967

1968

19691970

19711972

1973

197419751976

19771978

19791980

1981

19821983

1984

1985

1986

1987 1988

1989

1990 1991

1992

19931994

19951996

1997

1998

19992000

2001 20022003

2004

2005

2006

3840

4244

46

Gini

Coeff

icien

t

3 3.5 4 4.5 5% Employed by 10 Largest Firms

The 60s: Conglomerate mergers increase concentration; inequality declines

The 80s: bust-up takeovers split conglomerates back into parts; inequality increases

The 90s: quest for shareholder value induces downsizing, outsourcing

Why did firms want to be big?

Robin Marris, The Economic Theory of ‘Managerial’ Capitalism (1964):

“The main concluding theorem is that the various pressures mentioned above lead managers to maximise the rate of growth of the firm they are employed in subject to a constraint imposed by the security motive…We represent the former by the growth rate of gross assets and the latter by the valuation ratio.”

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Why did they change their minds?

•  Orientation toward share price leads companies to adopt strategies and structures valued by financial markets

•  Market-approved strategies include: –  Pervasive outsourcing (“Nike-fication”) –  Employment minimization –  Domain-shopping for tax havens –  Stock buybacks

•  Widespread orientation toward share price, as in the US, mutes growth in assets and employment

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A case study

•  In 1996, Sara Lee was #50 on the Fortune 500 list of the largest American corporations

•  Its brands included: –  Hanes –  Coach –  Champion –  Wonderbra –  Jimmy Dean –  Ball Park –  Douwe Egberts –  …and dozens of others

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The move toward shareholder value

•  “Sara Lee Corporation's mission is to build leadership brands in consumer packaged goods markets around the world. Our primary purpose is to create long-term stockholder value.”

•  “Wall Street can wipe you out. They are the rule-setters. They do have their fads, but to a large extent there is an evolution in how they judge companies, and they have decided to give premiums to companies that harbor the most profits for the least assets.”

John Bryan, CEO, explaining Sara Lee’s "de-verticalization" program

•  2012: after 15 years of shareholder-oriented restructurings and spinoffs, what was left of Sara Lee split into Hillshire Brands (US) and Douwe Egberts Master Blenders (Europe)

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The employment consequences of Sara Lee’s pursuit of shareholder value

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0

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Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Employment at Sara Lee (thousands), 1995-2012

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The era of giant employers is over in the US

0

100

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1000

Year

19

24

1926

19

28

1930

19

32

1934

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1938

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40

1942

19

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1946

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48

1950

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52

1954

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56

1958

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1962

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64

1966

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68

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72

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1990

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96

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00

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Employment at GM, 1923-2011

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The largest US employers have shifted from manufacturing to retail and other services

1960 GM AT&T FORD GE US STEEL SEARS A&P EXXON BETH. STEEL ITT

1980 AT&T GM FORD GE SEARS IBM ITT KMART MOBIL GTE

2010 WAL-MART TARGET UPS KROGER SEARS HLDGS “AT&T” HOME DEPOT WALGREEN VERIZON SUPERVALU

10 Largest US Corporate Employers, 1960-2010

Wal-Mart now employs roughly as many Americans as the 20 largest manufacturers combined

Manufacturing Oil Services

IS THIS JUST A U.S. THING?

Around the world, big employers are associated with low inequality (ca. 2006)

Canada

United States

Australia

New Zealand

Cote d'IvorieCameroon

AlgeriaEgypt

Ghana

Morocco

Senegal

Tunisia

South Africa

Zimbabwe

China

Indonesia

India

Japan

S Korea

Sri Lanka

Malaysia

Philippines

SingaporeThailand

Bulgaria

Belarus

Czech Rep

Croatia

Hungary

Poland

RomaniaSerbia

Russian Federation

Slovenia

Slovakia

Ukraine

Argentina

Brazil

Chile

Colombia

Mexico

Peru

Venezuela

Denmark

FinlandIceland

Norway Sweden

Austria

BelgiumSwitzerland

Germany

Spain

France

United Kingdom

GreeceIreland

Italy

Netherlands

Portugal

Turkey

2030

4050

60

Gini

Coeff

icien

t

0 5 10 15 20 25 30 35Ratio of Top 10 Employers to Total Labor Force

Asia Alley

Old Europe

Nordic Niche

Commie Corner

Latin Quarter

North North America

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Employment concentration: Colombia vs. Denmark, 2006

COLOMBIA   DENMARK

Company Name Industry Class Employees   Company Name Industry Class Employees

BANCOLOMBIA SA BANK 7,027   ISS AS INDUSTRIAL 273,534

INVERALIMENTICIAS SA INDUSTRIAL 6,798   GROUP 4 AS INDUSTRIAL 246,366

TEXTILES FABRICATO TEJICONDOR INDUSTRIAL 5,744   A.P. MOLLER-MAERSK A/S TRANSPORT. 62,300

BANCO DE BOGOTA SA BANK 4,800   CARLSBERG AS INDUSTRIAL 31,703

SURAMERICANA DE INVERSIONES S. OTH FINANCIAL 4,325   TDC AS UTILITY 20,573

CIA COLOMBIANA DE TEJIDOS - CO INDUSTRIAL 3,435   NOVO NORDISK AS INDUSTRIAL 20,285

ACERIAS PAZ DEL RIO S.A. INDUSTRIAL 2,834   DANFOSS AS INDUSTRIAL 17,543

BAVARIA SA INDUSTRIAL 2,729   DANSKE BANK AS BANK 15,382

COMPANIA DE CEMENTO ARGOS S.A. INDUSTRIAL 1,798   DANISCO AS INDUSTRIAL 10,634

CARTON DE COLOMBIA INDUSTRIAL 1,464   FALCK A/S INDUSTRIAL 10,241

Total  

40,954   Total   708,561              

Labor Force   22,771,433   Labor Force   2,834,422

             

Emp Concentration   0.18%   Emp Concentration   25.00%

The five biggest employers in…

Dominica #EmpChina #Emp US #Emp Denmark #Emp Brazil #Emp Bangladesh#Emp

JASTAPHAN&CO. 350

PETROCHINACOMPANYLIMITED 534652

WAL-MARTSTORES 2200000ISSA/S 522258

ITAUUNIBANCOHOLDINGS 93175JANATABANK 14413

HHVWHITCHURCHANDCO 220

AVIATIONINDUSTRYCORP 500000

USPOSTALSERVICE 488000

APMOLLER-MAERSK 89209

PETROLEOBRASILEIRO 80908

ZAHINTEXINDUSTRIES 13400

DOMINICAELECTRICITYSERVICES 219

AGRICULTURALBANKOFCHINA 493583KROGERCO 400000NOVONORDISK 51059VALES.A. 76531

BANGLADESHEXPORTIMPORTCO 7852

NATIONALBANKOFDOMINICA 149

INDUSTRIAL&COMMERCIALBANKOFCHINA 462282

HOMEDEPOTINC 371000CARLSBERGA/S 46832

MARFRIGGLOBALFOODSS.A. 45243PUBALIBANK 7645

FINEFOODSINC. 130

CHINACONSTRUCTIONBANK 372321TARGETCORP 347000

LUNDBECKFONDEN 32135

TELEFONICABRASILS.A. 26598

ADVANCEDCHEMICALINDUSTRIESLIMITED 6930

And now, the part where institutions become relevant

Gnomic research question:

How are corporations like breakfast?

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Institutional domains that shape corporate structures

•  Product market competition •  Labor market regulation •  Capital market structure •  Education systems •  Social welfare provision (health care, retirement)

What should an auto company board look like?

“An organization must have an elite structure of such a form and character that those people in the society who control resources essential to that organization’s success will be satisfied that their interests are represented in the goal-setting apparatus of the enterprise…” (Stinchcombe, 1965)

–  GM: 11 directors, one GM manager (CEO) –  Daimler: 20 directors, 3 Daimler managers, 10 labor

representatives –  Toyota: 21 directors, 15 current or former Toyota

managers –  Geely: 13 directors, 8 Geely managers

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Bruno Amable’s varieties of capitalism

•  Market-based: USA, UK, Canada and Australia

•  Social-democratic model: Sweden, Finland and Denmark

•  Continental Europe: France, Germany, Austria, Belgium,

Ireland, Norway (Switzerland and Netherlands)

•  Mediterranean: Italy, Spain, Portugal and Greece

•  Asian model: Japan and South Korea

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Income inequality and varieties of capitalism

Australia

Canada

United Kingdom

United States

Japan

South Korea

Denmark

Finland

Sweden

Austria

BelgiumFrance

Germany

Ireland

Netherlands

Norway

GreeceItaly

Portugal

Spain

2530

3540

45

Gini

Coe

fficie

nt

0 5 10 15 20 25

Ratio of Top 10 Employers to Labor Force

Social Democratic

Continental Europe

Market Based

Asia

Mediterranean

2025

3035

40

Ineq

ualit

y (G

ini c

oeffi

cien

t)

1960 1970 1980 1990 2000 2010Year

SWE DNK

FIN

2025

3035

40

Ineq

ualit

y (G

ini c

oeffi

cien

t)

1960 1970 1980 1990 2000 2010Year

JPN KOR

2025

3035

40

Ineq

ualit

y (G

ini c

oeffi

cien

t)

1960 1970 1980 1990 2000 2010Year

DEU FRA

BEL

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Income inequality and varieties of capitalism

2025

3035

40

Ineq

ualit

y (G

ini c

oeffi

cien

t)

1960 1970 1980 1990 2000 2010Year

ITA PRT

Asia Continental Europe

Social democratic

Mediterranean

Note the eerie “millennial convergence”

WHAT HAPPENS IF “FIRMS” DISAPPEAR?

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The number of public corporations in the US has dropped by over half since 1997

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Source: World Bank World Development Indicators 2014

3000

4000

5000

6000

7000

8000

9000

10000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US listed companies

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The “going public” fad of the 1990s is long gone

Source: Jay Ritter, University of Florida

0

100

200

300

400

500

600

700

800

IPOs per year, 1980-2014

And the companies that go public have “dual class voting rights” that guarantee founders eternal control

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Ironwood Pharmaceuticals Inc Groupon Constellium NVCrude Carriers Corp Manning & Napier RCS Capital CorpMaxLinear Inc Zynga Coty IncFirst Interstate BancSystem In Renewable Energy Group Truett-Hurst IncDynaVox Inc Yelp Luxoft Holding IncPAA Natural Gas Storage LP Vantiv Silvercrest Asset ManagementS&W Seed Co Digital Cinema Destinations Noodles & CoNiska Gas Storage Partners LLC Edgen Group Inc NRG Yield IncOxford Resource Partners LP The Carlyle Group LP UCP IncAmeresco Inc Tilly's Inc Jones Energy IncGreen Dot Corp Facebook Inc Intrexon CorpChesapeake Midstream Ptrs LP KAYAK Software Corp Pattern Energy GroupRhino Resource Partners LP Globus Medical Inc Premier IncBooz Allen Hamilton Holding Co Manchester United PLC RingCentralFXCM Inc Workday Inc RE/MAX HoldingsSwift Transportation Co Seadrill Partners LLC LDR HoldingAdecoagro SA The WhiteWave Foods Co Veeva SystemsMagnaChip Semiconductor Restoration Hardware Hldg Inc JGWPT Holdings LLCApollo Global Management PBF Energy Inc ZulilyGNC Holdings Zoetis Inc AMC Entertainment HoldingsTMS International Health Ins Innovations Inc EP Energy CorpArcos Dorados Holdings Artisan Partners Asset Mgmt In Malibu BoatsBox Ships Inc Taylor Morrison Home Corp uniQure BVAir Lease Corp Fairway Group Holdings Corp Ladder CapitalLinkedIn Corp Blackhawk Network Holdings Inc Lumenis LtdYandex NV PennyMac Finl Svcs Inc Castlight Health IncKiOR William Lyon Homes Inc Phibro Animal Health CorpZillow Tableau Software Inc Moelis & Co LLC

Source: Jay Ritter, University of Florida

Nobody actually works at these new companies, and most will not last long

Company Employees (year-end 2015) Zynga 1669 LinkedIn 9372 Groupon 3846 (North America) Zillow Group (Zillow + Trulia) 2204 Yelp 3826 Facebook 12,691 Tableau 3008 Zulily 2907 Box 1370 TOTAL 40,893

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Circuit City employees in 2008 (US): 42,974 Source: 10-K statements via EDGAR

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After Nikefication: Uberization

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As of Sept. 2015, Uber has ~4000 employees and 327,000 “driver-partners” in the US

Source: Hall & Krueger, 2015

Tentative factoids

•  Corporate size varies widely and systematically around the world, both in absolute terms and relative to the size of the labor force

•  Corporate employment concentration is positively related to equality –  Very strongly in the US (over time) –  Somewhat strongly around the world (cross-sectionally)

•  The size of a country’s largest corporations and its level of inequality are connected to its “variety of capitalism” (VOC)

•  A possible (fuzzy) causal chain: –  VOC=>concept of corporationà corporate sizeà inequality

PARKING LOT

What’s next in the US? Top 4 post-IPO job creators since 2001

•  GameStop (57,500 net jobs since 2002) “Each of our stores employs, on average, one manager, one assistant manager and between two and ten sales associates, many of whom are part-time employees…We have approximately 17,000 full-time salaried and hourly employees and between 30,000 and 48,000 part-time hourly employees worldwide, depending on the time of year”

•  Stream Global Services (30,997 net jobs) “We are a global business process outsourcing (‘BPO’) service provider specializing in customer relationship management (‘CRM’) … Our service programs are delivered through a set of standardized best practices and sophisticated technologies by a highly skilled multilingual workforce with the ability to support 35 languages across approximately 51 service centers in 22 countries.”

•  Brookdale Senior Living (30,640 net jobs) “As of December 31, 2012, we are the largest operator of senior living communities in the United States based on total capacity, with 647 communities in 36 states ”

•  Las Vegas Sands (29,600 net jobs) “Through our 70.2% ownership of Sands China Ltd. (“SCL”), we own and operate a collection of integrated resort properties in the Macao Special Administrative Region (“Macao”) of the People’s Republic of China (“China”). These properties include The Venetian Macao Resort Hotel (“The Venetian Macao”), the Four Seasons Hotel Macao, Cotai Strip (the “Four Seasons Hotel Macao,” which is managed by Four Seasons Hotels, Inc.) and the Plaza Casino…In Singapore, we own and operate the iconic Marina Bay Sands, which has become one of Singapore’s major tourist, business and retail destinations since its opening in 2010. Our properties in the United States include The Venetian Resort Hotel Casino (“The Venetian Las Vegas”) and The Palazzo Resort Hotel Casino (“The Palazzo”), Five-Diamond luxury resorts on the Las Vegas Strip, as well as the Sands Expo and Convention Center (the “Sands Expo Center”) in Las Vegas, Nevada and the Sands Casino Resort Bethlehem (the “Sands Bethlehem”) in Bethlehem, Pennsylvania.”

What do people do when they study inequality?

•  Poverty: why are some people or groups poor? Why do some countries have higher poverty rates than others?

•  Mobility: how do some people become (or stay) rich? Why do some societies have higher class mobility than others?

•  Global inequality: why are some nations consistently richer than others? What accounts for different trajectories of GDP growth?

•  Comparative inequality: why do some nations have greater internal inequality of income (or wealth)? What accounts for national trends in income distributions?

A matrix of possible topics

•  Units of analysis –  Countries (within or across) –  Organizations (within or across)

•  Measures –  Concentration (the 1%)

§  Income (static vs. trajectory) §  Wealth (static vs. trajectory)

–  Distribution §  Income (static vs. trajectory) §  Wealth (static vs. trajectory)

•  Divides –  Race –  Sex