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Do firms make economic stagnation worse?

Economic Stagnation

Any topics around economic stagnation (and/or economic growth) are pretty hard to break down in something akin to a blog post. They are obviously complicated and multi-faceted, and because most people in the world probably got a B-Minus in Econ, a lot of people really have no effin’ clue what they are saying when they discuss this stuff. If you go on Facebook anywhere around a jobs report, you get half the clowns screeching “Fuck you, Obama!” and posting memes of rising unemployment. Then the other half is like “greatest President ever” and posting the same memes with the numbers going in reverse. Related: social media is driving us apart.

I’ve never really understood the “unemployment rate” argument among white, middle-class people with jobs. (People much smarter than me don’t get it either.) If you’re hollering about the unemployment rate on social media, you probably fall into three camps:

  • I have a job and don’t really give a shit, but this seems like a good conversation to enflame others
  • I have a job and care deeply
  • I don’t have a job and OMG THIS RATE IS SO REAL

The way you perceive the economy is kind of contextual relative to your own deal. It’s hard for an individual to have a macro level understanding of the economy because, I mean, you got a specific car in your specific house and you buy certain specific brands.

The bottom line on a lot of this for the last few years seems to be that job growth is rising (thanks, Obama!) but wages are stagnant. So we may have some legitimate economic stagnation going on. In different political debates (egad), you’ll hear various ideas on how to fix this. A lot of these ideas are tied to firms supposedly creating jobs and making them well-paid. Hmmm. I would never see that logically happening, but now there’s research that explains it better. Let’s try.

Economic stagnation and the firm-size wage effect

This one isn’t hard to grasp. Basically, if you work for a bigger place, you should probably make more money. That’s an easy-to-get version of what “firm-size wage effect” means. If Microsoft hires you as a sales manager vs. a startup hiring you, Microsoft can probably base you more base initially. Right?

Here’s a new article on Wharton’s website about firm-size wage effect; it’s predominantly based on this paper about economic stagnation and inequality issues arising here. The ultimate finding is that the middle and bottom of the wage scales feel the biggest negative effects from the degrading link between firm size and wages. At the top of the wage scale? You experience essentially no loss.

Here’s the money shot from one of the researchers:

“Working for a big, stable company would have typically been seen as a fantastic career decision — there’s opportunity for advancement and good wages,” Cobb says. “That no longer seems to be the case. The advantages of working in a large firm have really declined in some meaningful ways.”

Onto Step II.

Economic stagnation: But this is OK, because more of us are entrepreneurial now. Right?

Actually:

Economic Stagnation Trump

Many first-world, western economies are actually becoming more bureaucratic over the last 20 years. It’s very true that The Gig Economy / Sharing Economy are real, but in general, more of us are working in large organizations than ever before.

Researchers also note that uneven erosion of the firm-size wage effect explains around 20% of rising wage inequality during the study period of 1989 to 2014. That’s about 1/5th on rising wage inequality.

In short, it appears that firms are — to some extent — responsible for the economic stagnation that many of us feel.

Wouldn’t economic stagnation be a logical outcome for firms?

Of course. The first thing to remember is that firms aren’t responsible for moral norms, as humans (should) be. That’s why no people issues matter, and they all get kicked to HR. In short: no one gives a shit.




 

The real reason for the existence of a firm is to make money. (Nonprofits are different, yes.) The term is “maximizing shareholder value.” Places like Silicon Valley hide behind “Well, we are changing the world.” In  reality, those dudes want to buy helicopters to make cool landings at Coachella. In an advanced capitalism, everyone chases the cheddar. It’s really that simple. We hide behind other reasons we’re doing it, but we’re all out to get paid and get laid. You know?

In the past 10-20 years, the C-Suite has doubled (5 to 10 average members). You’re creating ridiculous roles like “Chief Fun Officer.” At an enterprise company, that guy has to make about $175,000 base. That means there is less for some “Product Marketing Manager” down the chain. We all know how this ends. The Chief Fun Officer does literally nothing all year — take a few meetings, fly to some places — and the product marketing manager busts his hump on 991 “sense of urgency” projects. What happens? The Fun Officer gets a bonus as percentage of base and hits off Christmas in Turks. The product marketing manager is working Christmas Eve on some no-context deliverable.

That’s economic stagnation writ large. And firms aren’t helping.

Can we fix economic stagnation?

Can you and I? Probably not. It can be fixed, though — although it’s a host of factors well beyond our control and understanding.

At the firm level, I’d argue for a couple of things:

Firms do seem to be making economic stagnation worse before they make it better, though.

Ted Bauer

One Comment

  1. Well done Ted for being brave enough to attempt to dive into economics. I like your classification of how the 99% approach the subject, i.e. with the naiive belief that who holds sway in govt. is all that matters.

    And I agree with your arguments about firm size wage-effect.Mind you, plenty of big firm people who are crazy busy with bureaucracy will doubtless feel stung by your characterization.

    Big firms suit governments because they are easier to control. And they have the scale and cashflow to afford the countless bureaucrats needed to ensure government edicts are executed. Small entrepreneurial firms struggle with red tape and the burden this imposes. Thus I contend that a mutual dependency exists between big firms and govt, yet our future depends on the success and growth of small firms.

    And sadly bureaucratic SME ‘support’ packages just don’t deliver the sort of help SMEs can absorb. Fiscal policy that favours SMEs is much more effective. If you want an example of this check out the growth of micro-breweries in the UK.

    PS Keep up the great work!

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