Uncovering the Financialization Roots of Contingent Work

A Politico story by Danny Vinik was published this week with the headline “The Real Future of Work” and a provocative subtitle: “Forget automation. The workplace is already cracking up in profound ways, and Washington is sorely behind on dealing with it.” This is an important story that deserves to be read widely. Automation has the potential to shake-up the labor market, but as this story carefully documents, there is a more immediate trend that is already here and needs to be reckoned with. Yet, to mix my metaphors, I would add to this that there are still more layers to peel back to find underlying root causes.

But let’s back up. How is the workplace “already cracking up in profound ways”? This quote from the article summarizes it nicely:

Over the past two decades, the U.S. labor market has undergone a quiet transformation, as companies increasingly forgo full-time employees and fill positions with independent contractors, on-call workers or temps—what economists have called “alternative work arrangements” or the “contingent workforce.” Most Americans still work in traditional jobs, but these new arrangements are growing—and the pace appears to be picking up.

Indeed, the data suggest that between 2005 and 2015, “all net job growth in the American economy has been in contingent jobs.” The article also does a nice job of convincingly showing that this is a much bigger issue than the gig economy, which might only account for 10 percent of the growth in contingent work. My friend David Weil has also captured the breadth of the “fissured workplace” in his book, and as recounted in this article, did a heroic effort at the Department of Labor during the Obama Administration trying to combat worker misclassification in which firms classify workers as contractors to avoid labor standards that apply to regular employees.

So there is really a twin phenomenon at work here: 1) the actual subcontracting of work and increased reliance on contingent workers, and 2) paperwork maneuvering to misclassify regular workers as contractors and temps. In both cases, the fissured workplace is a serious issue because “For many employees, their new status as “independent contractor” gives them no guarantee of earning the minimum wage or health insurance,” and the negative effects of insecurity are far-ranging. It’s hard to imagine a robust, democratic society with healthy families and communities when so many workers are stuck in insecure, contingent work arrangements. Anyone still doubting the pervasiveness of the trend toward contingent work arrangements needs to read Danny Vinik’s article. And remember that what happens at work, often doesn’t stay at work so the importance of bad work is magnified in our communities.

But what’s behind this powerful shift? The article doesn’t say. My own answer: in a (long) word, financialization. Financialization represents a multidimensional shift away from industrial capitalism in which corporations focused on making a profit by producing valuable goods and services, to financialized capitalism in which financial markets, motives, results, and institutions become dominant. An important part of financialization has been the rise of the ethos of shareholder value maximization.

In response to Japanese production methods, U.S. industry rationalized its operations in the 1980s; with the rise of digital technology, employment has been increasingly marketetized; and in response to globalization, employment has been globalized.  Each of these trends were initially driven by corporate strategies to restore competitiveness by restructuring the productive capacity of their workforce in the face of changing technology and competition. But under the pressure of maximizing shareholder value, these efforts turn into cost-cutting exercises for the sake of increasing short-term profitability and driving up stock prices. Workers face wage and benefit concessions, jobs are subcontracted and made contingent, the workplace fissures, and workers are intentionally misclassified—even when companies are profitable.

This is because under the banner of maximizing shareholder value, investors are insatiable in their demands for perpetually higher financial returns. I submit that this represents a fundamental shift in values. We can also see the importance of values in the private equity dimension of financialization in which the shareholder value ethos is pushed to the extreme by seeing companies solely as assets to be traded for maximum profit. All of this is important because values are hard to legislate. If I’m correct, then this means that while efforts to address worker misclassification and other abuses, to make benefits more portable, and other initiatives are important, they do not get at the heart of the problem (or at the lack of a heart).

With that said, this shift in values has been accompanied by institutional practices, specifically deregulated financial institutions, shareholder-friendly laws, corporate governance structures with outside directors, activist shareholders, and massive stock incentives for corporate executives. Consider this last element: these incentives can lead to stock repurchases, which have grown tremendously in recent years. Rather than retaining and reinvesting cost savings and earnings back into the business as was the norm before the shareholder-value movement, cost savings and earnings are increasingly being used to repurchase shares of the company’s stock. This “downsize and distribute” strategy drives up the stock price which not only benefits investors, but also top executives because of their sizable stock options.

To really confront the key trends undermining stable and rewarding work that supports healthy families and communities, we need to dig into the roots of these trends. Financialization is likely a key root, if not the taproot. The better we can do identify causes, the better will be the discussions over what can be done. If financialization is important, then combating contingent work requires a combination of normative shifts (that are hard to legislate) and public policy changes (that are hard to implement). So where to start? Recognizing the harm of shutting workers out of corporate governance and of massive stock options are just two possibilities. Work is too important to be left to Wall Street.