Macro Roundup

Some of the World’s Largest Employers No Longer Sell Things, They Rent Workers

The list of the world’s largest employers was once dominated by household names like Ford Motor Co., J.C. Penney Co., and General Electric Co., companies that made and sold things.

A Analysis conducted for The Wall Street Journal shows those names are nowhere to be found on that list today. In their place are large outsourcing companies like Compass Group PLC, Accenture PLC and other businesses that essentially lease workers to clients.

Of the top 20 global employers in 2017, five are outsourcing and “workforce solutions” companies, according to an analysis by S&P Global Market Intelligence. In 2000, only one employer in the top 20—International Business Machines Corp., which offers outsourced IT services among its many businesses—fell into that bucket.

Outsourcing companies are vacuuming up the world’s workers as traditional employers are handing over more of their tasks to nonemployees, a shift that has transformed the way corporations do business and had profound effects on workers’ prospects and pay.

The past two decades have been boom times for the outsourcing sector, with the annual value of contracts growing to $37 billion in 2016 from $12.5 billion in 2000, according to research and advisory firm Information Services Group Inc. III -1.68% The market is expected to rise again in 2017 and 2018, thanks partly to double-digit growth in big technology projects as more companies transfer massive volumes of data to the cloud.

For employers, dispatching work to outside companies saves money and lets them access skills they need without adding to their headcount. Workers in jobs that have gone to outsourcers, though, can feel moved around like chess pieces, either displaced entirely or re-badged as employees of a service provider, sometimes with fewer benefits and lower pay. A growing body of economic research suggests that outsourcing is a significant factor fueling the rise of income inequality in the past decade.

“If all the engineers are in one firm and the cleaners are in another, you get less diversity within firms and more inequality across firms,” says Nicholas Bloom, an economist at Stanford University.

On behalf of loan-servicing companies, Accenture’s people collect debts from homeowners who defaulted on their mortgages. For large insurance clients, doctors and nurses employed by Accenture make wellness calls to diabetes patients. For Alphabet Inc.’s Google, it oversees contractors who review content for the search giant.

“We become part of our clients’ operations, we become part of the talent that’s in their operations,” says Debbie Polishook, group chief executive of Accenture Operations, which houses the company’s outsourcing work.

“When CEOs tell me they want to keep all of their talent, my response is ‘Why?’” says longtime Kelly Services Inc. boss Carl Camden, who retired earlier this year. “ ‘If they’re not our people, how can they be our people?’ is a tautology you have to work them through.”

The breadth of services on offer from outsourcing firms is staggering. Compass Group was founded in 1941 to run factory cafeterias in wartime England, eventually branching out into corporate catering. It now employs more than 550,000 and counts among its subsidiaries firms like Eurest Services, which staffs and manages mailrooms for clients, provides them with full-time receptionists, sets up their conference rooms for meetings and operates their warehouses. Eurest’s clients include Google, SAP and Pfizer Inc.

With so much work done outside the company, businesses employ fewer kinds of workers than they used to, a change that economists say has fueled income inequality.

Outsourcing leads to workers being clustered in companies according to their skills, which affects pay and benefits. A bank used to employ janitors and security guards, in addition to traders and salespeople. For the sake of morale and a sense of fairness, management had an incentive to limit the disparities in employees’ compensation. That had the effect of boosting the pay of lower-skilled staff.

Now, those janitors might just as often work for an outside firm like Denmark’s ISS AS, one of the largest facility services companies in the world, while the high-skilled workers remain employed by the bank—a trend economists call occupational sorting. Pay for outside workers tends to be lower because outsourcing firms need to keep costs low to compete for contracts and because the workers don’t reap rewards from the financial successes of the bank.

Companies that provide security guards or IT help-desk workers have to show they can do the job more cheaply than the client can, keeping a tight lid on wages for those workers, says David Weil, a Labor Department official in the Obama administration and an expert on contract labor.

Outsourcing firms’ workforces, though, may shrink as algorithms take on more tasks, says Steve Hall, a partner at ISG.

“The large outsourcers are using a combination of analytics and automation to significantly reduce the need for labor,” he says.
I'm one of the opinion editors atDow Jones MarketWatch, a no-paywall website about all things money. We get about 30 million unique visitors a month, mostly from the U.S. I'm reaching out because I have your book "The Upside of Inquality" and just read theNew York Times article about all the contract workers in Silicon Valley. I'm looking for an op-ed on what this says about the changing nature of work and the political ramifications of this sort of change. Is this a topic you'd be interested in writing about for a broad audience? If so I'd love to talk. I look forward to hearing from you. Silvia Ascarelli

Lauren Weber, "Some of the World’s Largest Employers No Longer Sell Things, They Rent Workers,"Wall Street Journal, December 28, 2017, https://www.wsj.com/articles/some-of-the-worlds-largest-employers-no-longer-sell-things-they-rent-workers-1514479580

McKinsey thinks that sector specific supercycles/boom bust account for 1/3 of the decline in labor's share of income in the United States, also finds that 75% of the decline in labor share btw 1945-2016 took place btw 2000-2016

"....In this paper, we look at the relative importance of different factors in the United States through a focus on the complement of the labor share decline—that is, the rise in capital share of income. We decompose this into the role of depreciation, capital-to-output ratios, and returns on invested capital and link them to a microanalysis of 12 sectors.While our findings confirm the relevance of the most commonly cited factors, they also suggest that other trends often absent from the current debate played an even more central role. Key findings: The labor share of income in the US private business sector declined by about 5.4 percentage points between the periods 1998 to 2002 and 2012 to 2016. Without such a decline since 1998, average worker pay might be about $3,000 higher per year in real terms. The decrease between 2000 and 2016 accounts for three-quarters of the overall decline in the US labor share of income since World War II. Our analysis finds that the fall accounts for 18 percent of the gap that opened between median wage growth and historical productivity growth. Weak productivity growth explains 50 percent of the gap, while disproportionate distribution of income gains to highly paid workers accounts for 19 percent. Twelve sectors that make up about one-third of employment and 44 percent of economic output explain the overall decline in labor share or increase in capital share. These tend to be more globalized, more digitized, and more capital-intensive than the overall economy, but also include high-employment services like wholesale and retail. Eight of the 12 sectors experienced faster than-average wage growth, in most cases supported by above-average productivity growth. Nevertheless, almost all of these sectors have experienced a decline in labor share of more than five percentage points. In analyzing the various hypotheses behind the labor share decline across these sectors,we find that a set of supercycle and boom-bust effects appears as the main driver, accounting for one-third of the total decline since 1998. The commodity supercycle notably increased profits in the mining sector, while the real estate boom temporarily increased capital stocks in the sector and its weight in the total economy. The second-most important factor (26 percent of the decline) is rising and faster depreciation, due to higher capital stocks and a shift to intangible assets with shorter life cycles.For example, computer and electronics manufacturing raised the share of assets from intellectual property products in total capital and, with it, depreciation. Pharmaceuticals and chemicals also used more intangible capital and experienced higher depreciation. Superstar effects—which see a small proportion of large firms capturing a disproportionately larger share of economic profit than their peers—along with industry consolidation appear to explain about 18 percent of the decline, including in sectors such as telecommunications, media, and transportation. Capital substitution of labor and automation could underpin 12 percent of the labor share decline, according to our estimates. Globalization and decreased labor bargaining power, which affected the automotive sector among others, account for the remaining 11 percent.While further research will be needed to confirm and refine these findings, they already highlight some trends and implications. First, it is clear that economic context matters and a decline in labor share is not, per se, “bad.” For instance, while the shift to intangibles has negatively affected the labor share, it can raise productivity. Our research highlights the importance of driving productivity growth as the most important determinant of wage growth. Improving human capital will also be essential. Raising investment rates could have a much higher positive effect on productivity and wages than the historically smallish negative impact of capital deepening on the labor share. Our research suggests that labor share declines could continue but at a slower pace.Commodity cycle effects should taper off, and offshoring for reasons of labor-cost arbitrage is declining. The ongoing shift to intangibles will likely continue to raise depreciation, however. Superstar effects also have grown stronger, although policy changes or hypercompetition might alter the trajectory. Capital substitution and technology deployment look set to continue or accelerate, with significant uncertainty around the elasticities of labor substitution versus complementation as a critical determinant of whether that will be good or bad for the labor share. Our research on automation suggests that more occupations will be complemented than substituted...."

James Manyika, Jan Mischke, Jacques Bughin, Jonathan Woetzel, Mekala Krishnan, and Samuel Cudre, "A new look at the declining labor share of income in the United States," McKinsey & Company, May 2019, https://www.mckinsey.com/featured-insights/employment-and-growth/a-new-look-at-the-declining-labor-share-of-income-in-the-united-states

new Gutiérrez on the decline of labor's share finds once they include dwellings and self employed workers the labor share has been stable since the 1970's in advanced economies with the exception of the United States whose decline was driven by manufacturing post 2000 (see figure 1)

"...We identify two undocumented measurement challenges affecting corporate sector labor shares outside the United States: the inclusion of dwellings and the inclusion of self-employed workers in the corresponding sectoral accounts. Both issues have become more important over time, biasing corporate labor shares downward. We propose two methods to correct for these challenges and obtain 'true' non-housing labor share series. Contrary to common wisdom, the corrected series exhibit stable labor shares across all major economies, except the US, where the corrected labor share declines by 6 percentage points since 1980.....The corrected series suggest that non-housing labor shares have remained broadly stable since 1970 for all advanced economies but the US.....illustrated by the dashed line in Figure 1.A corollary of this result is thathousing explains all of the decline in European total economy labor shares.The US NFC labor share is largely unaffected by housing or self-employment, so it still exhibits a sharp decline - particularly after 2000 (black solid line). To conclude, we look within regions, across industries. We find that labor shares have remained largely stable across EU industries and US non-manufacturing industries - on average. Thus, most of the decline in the US labor share is due to manufacturing. The uniqueness of US trends and the critical role of manufacturing cast doubts on most technological explanations for the labor share decline, which apply both across regions and across industries...."

Germán Gutiérrez and Sophie Piton, "Revisiting the Global Decline of the (Non-Housing) Labor Share," May 17, 2019, https://drive.google.com/file/d/1RMTqNNJFUSxeMx9UsObAgqUeb3HU2K8i/view

"....In 1979, the startup rate—measured as the share of new employers as a fraction of all employers—was 13 percent. In 2007, before the onset of the Great Recession, it was roughly 10 percent, an almost 25 percent decline.....We propose a simple and novel explanation for these patterns. The startup rate is linked in general equilibrium to the pace of labor supply growth, which for reasons largely pre-determined by demographics, slowed dramatically in the late 1970s. Why should labor supply growth affect the startup rate at all? Ultimately, growing labor supply requires growing labor demand, and this can only happen through a decline in the real wage that allows incumbent firms to expand or through entry of new firms. A lesson from models of firm dynamics, starting with Hopenhayn (1992), is that in the long run, free entry ensures that shifts in labor supply are absorbed entirely at the entry margin. Along the balanced growth path of a standard model of firm dynamics extended to incorporate labor supply growth, slower growth in labor supply requires slower growth in the number of firms and thus a lower startup rate.....This explanation fits the data very well. The slowdown in U.S. labor supply growth since the late 1970s explains roughly two-thirds of the declining startup rate; it explains the widespread declines across markets since the labor force growth slowdown affected them nearly universally; and it explains the stability of average incumbent dynamics conditional on their age...."

Fatih Karahan, Benjamin Pugsley and Ayşegül Şahin, "Demographic Origins of the Startup Deficit," Federal Reserve Bank of New York, May 2019, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr888.pdf

Love how they paint a success story, more low skilled single mothers working as a problem

"...The share of young single mothers in the work force has climbed about four percentage points, driven by those without college degrees, according to a New York Times analysis of Current Population Survey data. It’s a striking rise even compared with other groups of women who have increased their labor force participation during this period of very low unemployment.The last time single mothers’ labor force participation grew so rapidly was during the 1990s, driven by a thriving economy and major federal policy changes, including welfare overhaul and tax incentives. In recent years, though, there has been no new federal policy that would obviously encourage single mothers to work in large numbers. Instead, they seem to be responding to a patchwork of policies, both carrots and sticks. At the federal level, the safety net has become less reliable, so working for pay is increasingly their only option.But at the local one, new policies like paid leave and minimum wage increases have made it more feasible for single mothers to work. Together, these appear to have primed them to take advantage of the biggest driver of all: a highly competitive labor market....."

Claire Cain Miller and Ernie Tedeschi, "Single Mothers Are Surging Into the Work Force,"New York Times, May 29, 2019, https://www.nytimes.com/2019/05/29/upshot/single-mothers-surge-employment.html