Silicon Valley Is Harming Workers And Creating More Economic Inequality, Says Expert

The old story of the American Dream is pretty straightforward: You work hard in school, develop skills and then get a job that provides decent wages and solid benefits. It was a dream that was actually realized by millions of people a generation or two ago — but journalist Rick Wartzman says the dream is increasingly out of reach because of a radically altered relationship between employers and employees, and also because of the new supremacy of shareholders over community stakeholders.

Wartzman is a former Wall Street Journal reporter whose new book is called “The End of Loyalty: The Rise and Fall of Good Jobs In America.” In a podcast interview with International Business Times, he discussed how huge corporations once took responsibility for providing for their workers and retirees. But over the last 30 or 40 years, he argues, the fundamental relationship between companies and their workers changed in a way that began prioritizing shareholder returns and corporate profits over everything else.

Subscribers can click here to listen to the whole podcast. What follows is an excerpt of the discussion.

What was the typical experience for workers at major corporations in the mid-20th century – and how does that differ from today?

The experience was much different than today fundamentally in this way — or these ways, I should say. Job security was much stronger than today even down to folks on the front lines. Pay was rising and it rose markedly from the late 1940's, mid-to-late 40's after World War II, all the way up until the early 70's. And benefits were rising as well where there was a very small percentage, 15 percent, 20 percent of workers who had basic healthcare coverage, for example, in the late 40's that would rise to over 70 percent by the early 70's. Pension coverage, there were actually things called pensions back then where people were guaranteed a set amount of income after they retired for all of their days.

In many ways, to me, that was the fullest expression of the social contract between employer and employee. It was built on this expectation of lifelong loyalty between the parties. About half of the American workforce would end up with a defined benefit pension plan. In terms of your pocketbook issues, corporate America had created this kind of private welfare state almost where they really took good care of you.

In providing better wages and benefits to workers, were corporate CEOs just nicer back then? Or were they forced to provide those better wages and benefits because unions were stronger a few generations ago?

I wouldn't say CEOs were nicer. I don't think they were nicer, but I do think that there was an important element of culture writ large that played a very important role coming out of the Depression and World War II. There was definitely more of a "we" culture in American society than an "I" culture. And CEOs did talk much more explicitly about needing to balance the interest of all of their stakeholders, not just take care of their shareholders.

There really was a different ethic at that time, and I think that corporate cultural norms reflected and reinforced these bigger societal norm. I think that was an element but you are absolutely right. I spent a lot of time early in the book talking about the role of unions, of organized labor. Jim Carey from the electrical workers and Walter Reuther from the autoworkers are major figures in my narrative because just as you say, a lot of the pay and benefits were hard won and hard fought for, often with blood spilled by unions.

I think the lesson there is that at that time and rising up through the 50's — when about 25 percent to 35 percent of the private sector workforce in America carries a union card — there was enough of a countervailing power to make a difference not only for those in unions but there was, well-documented by scholars, this tremendous spillover effect to the rest of the economy. Other blue collar workers saw their pay and benefits rise by the gains won at the bargaining table through these big industrial unions.

And even white collar workers, often their benefits were patterned after what the unions were able to win. Unions very much helped to forge the social contract and lift all boats. Now, when we're at a point where less than 7 percent of the private sector workforce is a unionized. There just isn't that countervailing power and there's no longer that spillover effect that helps lift up everybody.

Henry Ford was famous for promoting the idea that its good to pay workers well so they can buy your company’s product. That doesn’t seem to be the corporate ideology today. When and how did that change?

This idea is the virtuous cycle that Henry Ford famously kicked off in some ways — at least symbolically — by raising his workers' wages from a dollar a day to $5 a day overnight. Lo and behold, suddenly, they could afford to buy cars. They could buy Fords. That was a very common sentiment among top business executives through the 40's and 50's and even into the 60's. There's a quote in my book from Charlie Wilson, the president of General Electric, who says, "How are they going to buy my refrigerators if I don't give them good enough wages do it with?"

They got this idea and again, you look at today. Some like Larry Summers are warning about secular stagnation, meaning we just may not be paying across the economy workers enough with wages flat for decades on in for 80 percent of the workforce. We may be not putting enough dough in their pockets to keep the economy humming, so there is real concern. What got lost between then and now, the great shift, I think, they're all kinds of forces that change the social contract.

Automation and technology, globalization and trade with low wage competitors around the world, the shift from blue collar work where you could get a job with a high school degree or even less: hard, backbreaking work, often dirty. But it put you on a path to the middle class. You could make decent money and have health and retirement security. The fracturing of jobs into temp work and all those things. There are a lot of big forces that have happened over the decades.

But the real philosophical shift was going from that stakeholder model that I spoke of, balancing the interest of all stakeholders. Shareholders, yes, but workers and customers and communities you operated in. And again, CEOs talked about that very explicitly to going by really the mid 70's and then the kicking off really in the 80's and through the 90's and accelerating to today, a very different model where now, it's all about maximizing shareholder value. Companies have decided very explicitly to put investors above all those other stakeholder groups, and when you do that, it's just a matter of math. Workers don't fare as well.

Were there some key moments and key people that hastened the shift you are describing?

Yeah. There were some. One, a lot of the weaknesses in American business were exposed by the recession in the early 70's that are actually back-to-back recessions. It was the period of stagflation, this incredible, double wallop of high unemployment and high inflation that would kick in and really plague the country for quite a long time. That's sort of signaled that, again, the American corporation would no longer be as dominant as it was on the world stage and that was certainly a hastening factor. A lot of people mark 1973 and the recession then and the oil crisis in a period where productivity began to decline and wages for the first time in real terms began to decline, as an important marker.

The other one was in terms of the philosophical shift that accompanied this was two things. Milton Friedman, the famous University of Chicago economist, who wrote a very famous piece in 1970 in the New York Times magazine where he laid out that the social responsibility, his words, of a business was only one — and that was for executives to act as the agents of the shareholders and to do their bidding and to do the one thing they cared about, and he said that was to make as much money as possible. He said that for an executive to do anything else was, he very explicitly said to try and create more employment, that that was pure and unadulterated socialism, I think were the exact words that he used in the piece.

Friedman started to give intellectual cover to investors and to business leaders to shift from this stakeholder model to this maximizing shareholder value model. That was then picked up by a large group of academics on the business side. Most importantly, there was a paper written in 1976 by Michael Jensen and William Meckling then at the University of Rochester School of Management. Jensen became the biggest proponent of this agency theory as it's called, that managers need to be the agents of the shareholders. That's their job. He went on to Harvard and they wrote a paper, Jensen and Meckling, that became the most cited academic business paper of all time. Again, that was its theme, that maximizing shareholder value was the thing for executives to do.

What about the role of technology and automation — how has that changed the social contract between workers and employers?

I think of technology in two ways. One is just automation so that is something that's been accelerating over, obviously, human history but in sort of the context of the story arc I'm talking about. Certainly, since the 1950's, by the mid to late 50's, companies like General Electric were automating factories as well as their back office operations and putting in these giant computer systems.

We tend to think that America doesn't manufacture anything anymore. It's not true. Industrial output is actually higher than it was in the 50's. It just takes a lot fewer hands to do it. We don't need that many people. In some ways, it's analogous to what happened in agriculture. We produced a lot of food but how many farmers do you know? Most of it has been automated. So, one Fed study said that what took a thousand people to make in the 1950's, now takes somewhere between 150 and 200, and that's only increasing today; there's just not that many people around. You look at pictures of factories in the 1950's, they're full of people doing stuff.

That's had a huge impact, and again, sort of hastened the shift. If you're lucky enough and you can afford to have a good education and you get some skills, you become a knowledge worker and you can by and large do pretty well in this economy. But kind of their poor cousins or low wage service workers, we've kind of taken away these jobs in the middle. A lot of talk of economists is the hollowing out of the middle and that's what they're talking about.

Then, the other technological piece is very much, as you talk about, is that it has allowed companies to effectively extend their reach to overseas to the cheapest labor markets that there are. There's a book, it's academic. Richard Baldwin wrote it, "The Great Convergence," where he sees that only accelerate, that lots of things will be able to be done very, very cheaply because we can zip information around all over the place and go where the labor is cheapest.

Is Silicon Valley playing a positive or negative role for workers in the 21st century?

To me, Silicon Valley is emblematic of exactly the split that I'm talking about. At one end, you have these incredibly well-compensated jobs for knowledge workers, coders, engineers, data scientists. You work at Google and if you're an employee there, life is sweet. It's good. You can get, what, a Foosball table in your office and get free sushi and stuff. It's fantastic. But there's this whole other part of the economy there which is the fastest growing part.

That part in the former camp, I think the average wage, depending what data you look at, but it's $120,000 a year or something like that. They're good jobs. At the other end are jobs were people are making on average about $20,000 a year in a very expensive place to live and these are mostly temp jobs or gig work, independent contractors. They're 1099 employees, not W2 employees; 1099 workers and they have no benefits, so I say their pay is terrible. They are mostly Black and Latino and these are the people who are the shuttle bus drivers and the groundskeepers and the janitors and the security guards, often at very big high-tech headquarter complexes, some of which are now being built. New ones are springing up all over that region. You have this just tremendous divide between those on the high end and those on the low end…

The other important thing is on that high end, there's just not that many jobs that are created. Again, they're terrific jobs but the BLS [Bureau of Labor Statistics] data suggests there's something like a million software developers in the U.S. There are many times more that fast food workers and janitors and home healthcare aides who all of whom make less than $25,000 a year. Those knowledge worker jobs are great but Silicon Valley just doesn't create that many jobs.

What do you think can be done to rebuild a stronger social contract between employers and employees — one that is better for workers?

One thing I think we need to do is create portable benefits for those independent workers. I don't want to overblow this. Those in this kind of contingent jobs and this would include temp workers as well as independent contractors and on-call contract workers and so on, it's really about your very inflated numbers that's half the workforce and things like that. It's really not, depending on how you measure it. It's somewhere between 15 percent or 16 percent of the workforce. Those are the best numbers that I've seen…

It goes up to maybe 30 percent or 35 percent of the workforce if you include people who have a regular job but then, work at least once a week in some kind of, drive an Uber, whatever, on the side regularly to make ends meet. We need to increase benefits for them, portable benefits that people can take from gig to gig. And there are some interesting, at this point unfortunately small, kind of nods in that direction in New York State and Washington State but it's not nearly enough going on.

We need to really make sure we're enforcing the labor standards that are out there, particularly for those in low wage work. And what I mean by that is that, David Weil who was in the Obama administration labor department has done a ton on work on this in his, what he called the fissured workplace where people are in all these subcontracting roles and fast food franchises, that there's a lot of people who suffer wage thefts. You see their schedules get jerked around in a very dehumanizing way, in a way that makes it hard for them to plan and to take care of their kids. We just have to do a way better job of enforcing the laws on the books and unfortunately, we won't get that in the Trump administration that's calling for the labor department budget to shrink by more than 20 percent.

We need to do a much better job there. We need a true living wage across this country and I'd love to then see it indexed to inflation so we can stop fighting about this all the time…

We really need to rethink from top to bottom education. Training and education is not a magic bullet. It won't solve everything but again, we are in a knowledge age. We are leaving a huge numbers of people behind. Half the adults, slightly more than half in this country, don't have any kind of post-secondary education, not a four-year degree, not a two-year degree, not any kind of technical certificate.

It's really hard to make it in this economy, in this society now, without that and we do not do a good job at all of preparing people for lifelong learning. They're going to have to keep learning and keep going to school and keep getting new skills. We need to really rethink how we do that. Policy-wise, if I could do one thing, that would be the moonshot.

Then, the last thing I would say because I think it's so important, policy is hugely important. Government has a huge role to play, but we have to put pressure on companies to shift their philosophy, their mindset, their culture and norms away from this maximizing shareholder value model.

There are some ways we can do this as investors, as customers, putting our dollars into companies that treat their people well and there's an increasing number of digital tools where we can peek behind the curtain and see how companies pay and treat their workers. We need to pressure companies into thinking about their workers as assets again.