The trends are clear enough: things are shifting in a way that could leave workers in a precarious position in years to come. While individuals can take initiative to become superstars in key industries, the solution is going to be more complicated on an economy-wide basis, writes Linda Nazareth.
By Linda Nazareth, November 7, 2018
Be a superstar or go home goes today’s mentality. Superstar athletes attain stunning salaries, superstar companies dominate the financial markets, superstar CEOs raise questions about just how much compensation is appropriate. To the superstars go the spoils, apparently, while everyone else gets the scraps. But perhaps the influence of the superstar phenomenon goes even further than we thought. New research suggests that we now also have superstar sectors and that those sectors are changing the way that the economy functions and changing it in a way that does not favour workers.
The findings come courtesy of researchers at the McKinsey Global Institute (MGI) who took a broad look at superstar companies, cities and sectors. In the first two categories, the results are fairly predictable. Defining a superstar firm in terms of revenue, they found that such firms make 1.6 times more economic profit than their equivalents did a couple of decades ago, and that the top 10 per cent of such firms capture 80 per cent of profit in companies with revenues above $1-billion (hello, Amazon and Apple). In terms of cities, they found that the 50 superstars they identified (only 11 of which are in the United States and none of which are in Canada), make up 21 per cent of world gross domestic product (GDP) and are pulling away from their peers in growth of GDP per capita and share of world GDP.
It is in the sector analysis though that things get really interesting. Yes, they found that a huge chunk of gross value added and gross operating surplus – 70 per cent – has accrued to a handful of sectors over the past 20 years. That is not surprising: we already know that it is increasingly a winner-take-all kind of world. What is more startling is the finding that such sectors are structured in such a way that they are less likely to share the spoils with their workers than has historically been the case in high-flying industries.
So which are the superstar sectors? MGI identifies them as being in a clutch of categories: the internet, media and software; pharmaceuticals and medical products; financial services; professional services; and real estate. Among other characteristics, as a group these sectors tend to be less capital-intensive than average, but more intensive in terms of research and development and of skill. For example, skilled labour inputs are two to three times higher in financial and business services than they are in general. And yes, that does mean that some workers within those industries receive stratospheric salaries.
Superstar worker compensation aside, in superstar sectors the gains tend to accrue to “gross operating surplus”, which is to say to debt- or business-holders rather than to labour. That contrasts with the sectors that are on the decline, such as manufacturing. When those traditional sectors did well, you historically saw labour’s share of GDP also rise sharply. As the new superstars have gained ground, that relationship has apparently started to fracture. As a result, we are seeing gross operating surplus (a measure that includes measures of corporate and capital income) rise while labour’s share of GDP declines. In many countries, including Canada, Australia, Germany and Japan, gross operating surplus has risen by one to two percentage points over the past decade. In the United States, it has risen by 3.3 percentage points but even that is dwarfed by what is happening in China where the increase was 10 percentage points over the same period.
And when you do see wage gains in these superstar sectors, they tend to go to already-employed workers rather than toward employing new ones. So finance professionals get huge bonuses and the most coveted tech workers see their wages skyrocket, but that is about it. Certainly there is not a huge need to aggressively hire as output rises. Take the example of Alphabet (the parent of Google) as compared to Sears. As of 2017, Alphabet had about 88,000 employees in total, which may sound like a lot. But Sears, the now-defunct retailer, had about 140,000 employees in the United States last year. That is despite the fact that Alphabet was flying high while Sears was languishing.
None of this might seem to matter at the moment, not when Canada and the United States are enjoying the lowest unemployment rates they have seen in decades. There is no shortage of jobs around and, with demand high, wages are starting to move higher as well. The problem, however, is going to come when the business cycle moves down a bit, the labour-intensive, non-superstar sectors need less labour and the superstars do not pick up the slack. That situation could get even worse when sectors across the board increase their use of automation and demand for labour falls even further.
The trends are clear enough: things are shifting in a way that could leave workers in a precarious position in years to come. One way that individuals can protect themselves is to simply do what they need to do to become superstars within superstar industries and reap the rewards of doing so (a tactic that is obviously a lot less simple than it sounds). On an economywide basis, however, the solution is going to be more complicated and has to at least start with an acknowledgment of the way that the deck is being stacked.
Linda Nazareth is a senior fellow at the Macdonald-Laurier Institute. Her book "Work Is Not a Place: Our Lives and Our Organizations in the Post Jobs Economy," will be published later this month.