Fast food is made and sold entirely differently today. At McDonald’s—and, for that matter, at all similar chains—food arrives at restaurants almost entirely prepackaged and premixed, requiring only heating before being served. Franchises employ far fewer workers today than they used to—at McDonald’s, the number has fallen by over half. The elaborate prefabrication entails, moreover, that even though they are fewer, the remaining workers require less skill to prepare the food they sell; and fast-food jobs today involve little more than opening packages and pressing buttons.
The restaurants also pay lower—often minimum—wages, and Rensi now warns that campaigns to raise the minimum wage to $15 an hour will simply cause McDonald’s to abandon human workers altogether, in favor of robots. Furthermore, McDonald’s today offers virtually no training. Although Hamburger University still exists, it now educates incumbent managers and executives rather than recruiting new franchise operators. Indeed, the school increasingly focuses its teaching overseas, opening campuses in London and Munich in 1982 and subsequently in Sydney (1989), São Paulo (1996), and Shanghai (2010). Even its U.S. campus—relocated to McDonald’s corporate headquarters in Oak Brook, Illinois—now teaches in twenty-eight languages and caters more to foreign franchise owners than to U.S. workers.
Taken together, these changes have profoundly transformed work in the fast-food industry. Sophisticated new food-processing techniques and increasingly elaborate cooking machines shift production away from street-level workers, and human labor is increasingly skewed toward a new class of workers who design and manage centralized production and distribution. In Rensi’s words, “More and more of the labor was pushed back up the chain.”
The development has transformed the profile of McDonald’s workforce. The continuum of mid-skilled jobs through which Rensi rose has been displaced by a polarized workforce, composed of subordinate and superordinate workers with virtually nothing in common.
On the one hand, street-level work in fast food has been degraded, to involve menial tasks that require few skills. Many McDonald’s workers make the federal minimum wage of $7.25 an hour; the median wage for a McDonald’s employee with five to eight years of experience is just $9.15 an hour; and this is, incredibly, slightly higher than the wage at Burger King and Wendy’s. Flipping burgers has become the quintessential dead-end job.
On the other hand, elite work at these firms has been elevated, as super-skilled workers at the top now design and implement production processes that dispense with the need for mid-skilled workers at street level. McDonald’s current CEO has a university education and postgraduate training as an accountant and has never done full-time nonmanagerial work in the restaurant business. Moreover, elite pay has exploded. In a typical year in the late 1960s, McDonald’s CEO might have made $175,000 (about $1.2 million in 2018 dollars), or just under 70 times the income of a full-time minimum-wage worker; in the mid-1990s, the CEO made roughly $2.5 million (about $4 million in 2018 dollars), or more than 250 times the full-time minimum-wage income; and in the present decade, the CEO makes roughly $8 million, or more than 500 times the minimum wage.
The technology now used to cook and serve fast food explains both developments. Technology straightforwardly suppresses wages for subordinate workers—as Rensi’s warning that higher wages would provoke further mechanization emphasizes. Technology also, although less obviously, elevates wages for superordinate workers, and new management technologies in particular account for the CEOs’ enormous pay.
The recent history of work at McDonald’s illustrates a much broader phenomenon. Over the past half century, new technologies have collectively changed how goods and services are produced and, along the way, fundamentally transfigured the nature of work and the market for workers. Innovations, large and small, collectively shape which jobs exist: what tasks production requires and how tasks are arranged into the bundles called jobs, to be performed by a single person. Technological developments also influence the number of openings available for each type of job and therefore what wages workers receive for doing these various tasks.
A pattern emerges out of the cases. The rising technological tide has not lifted all boats equally, nor even lifted all boats at all. Instead, in sector after sector, technological innovation has shifted the center of economic production away from the middle of the skill distribution and toward the distribution’s tails.
On the one hand, new technologies substitute for mid-skilled human workers and eliminate the middle-class jobs that dominated the midcentury economy. On the other, new technologies complement both unskilled and especially super-skilled workers and increase the demand for both the least and especially the most skilled workers, creating the many gloomy and few glossy jobs that dominate production today. At the same time, innovation shifts the technological cut that separates elite workers from all others higher and higher up the skill distribution. (The idea that a generic BA guarantees a place among the elite has become almost quaint—a holdover from an earlier age.) This sharply increases the economic returns to super-skills born of intensive training and at the same time depresses the economic returns to mid-skilled, middle-class work. The superordinate working class owes its rise, and the middle class its fall, to technology’s divergent influences.
The most familiar new technologies, including the cooking machines that McDonald’s deploys, come out of the natural sciences and engineering and involve gadgets, hardware, and software. Many other innovations, less familiar but equally important, involve new institutional arrangements and even cultural developments rather than science or engineering. New administrative methods allow elite managers directly to coordinate and control legions of production workers, but only by rendering traditional middle-class white-collar jobs, from filing clerks through middle managers, obsolete. New legal techniques allow elite financiers to invest and to manage more money more precisely, but only by eliminating mid-skilled finance workers. Cultural and social innovations—including most especially meritocracy itself—also matter enormously. The immense skills and intense work ethic that meritocracy instills allow today’s elite to displace middle-class workers from the center of production and itself to pull the economy’s laboring oar, as earlier aristocratic elites could not possibly have done.
Taken together, these innovations deemphasize and disadvantage mid-skilled, middle-class workers and emphasize and advantage the superordinate working class. Without these developments, meritocratic inequality would be neither economically practicable nor socially sustainable. McDonald’s managers need them all in order to be capable of running the company in the new way.
These changes appear pervasively, across virtually all sectors of the labor market. Further case studies, which investigate entire industries rather than individual firms, demonstrate that McDonald’s is not an eccentric example and illuminate the pattern that the example introduces. Moreover, the industries that the case studies take up—finance, management, retail, and manufacturing—familiarly lie at the epicenter of rising economic inequality. Financial and managerial elites epitomize the superordinate working class, retail workers epitomize new subordinate labor, and manufacturing workers epitomize the disappearing middle class. The case studies therefore cover a substantial share of the gloomy and especially of the glossy jobs in the economy overall.
A lesson that repeats itself over and over, across different contexts, usually captures a general truth. The polarization of the labor market applies across the entire economy. Mid-skilled, middle-class workers have generally fallen victim to the technical changes that favor the elite; and innovation generally condemns these workers to newly gloomy jobs and elevates super-skilled workers to newly glossy ones. In these ways, school also remakes work in its image, and the new work order once again plays out meritocracy’s inner logic.
FINANCE
In 1963, The Economist magazine asked “Has Banking a Future?” and began its answer—focused on Britain but
equally applicable to the United States—by observing that banks were “the world’s most respectable declining industry.” To an extent hard to credit today, the midcentury elite steered clear of finance: in 1941, only 1.3 percent of Harvard Business School’s graduates went to work on Wall Street. The middle class filled the jobs that the elite abjured, so that from the end of the Second World War through the 1970s, finance workers were not appreciably better educated, more productive, or better paid than the rest of the private-sector workforce. Finance had become, at midcentury, boring, banal, and ordinary—a dead end.
The Economist’s prognosis could hardly have been more wrong. Shortly after its downbeat prediction, banking and investment firms began to enjoy a largely unbroken half-century-long boom. A host of innovations concerning new financial instruments, new information and computing technologies, new legal and regulatory regimes, and new institutions steeply increased finance’s share of economic life. Today, no sector is more closely associated with glossy jobs than finance, and finance workers—with their elite degrees, demanding hours, and enormous incomes—exemplify meritocratic inequality.
The financial sector’s share of the very richest Americans has grown roughly tenfold since the 1970s, and the sector now accounts for nearly a quarter of the fifty richest Americans. About a fifth of all billionaires now work in finance, as do two-fifths of the forty thousand Americans with investable assets of more than $30 million.
A still larger group of finance workers gets paid merely very large rather than astronomical incomes. The average bonus for a director at an investment bank might in a typical recent year reach $950,000, the average bonus for a vice president might reach $715,000, and the average bonus for a third-year associate might reach $425,000. In 2005, Goldman Sachs established a bonus pool of roughly $10 billion, or $500,000 per professional employee. Even Goldman’s analysts—typically twenty-two-year-olds straight out of college—might make $150,000 in a good year. Small wonder, given these incomes, that finance workers command on average about 70 percent more income than other workers and that overall, the rise of elite finance workers accounts for a substantial share—as much as 15 to 25 percent—of rising wage inequality in the economy overall. (In the meantime, wages for the lowest-paid finance workers, who now do gloomy jobs, have actually fallen recently.)
Finance might deploy a wide range of technologies, used by variously skilled workers, to deliver its services. Over roughly the past half century, the principal financial technologies and the skill profiles of finance-sector workers have both changed dramatically: an industry that was once dominated by technologies that favored mid-skilled, middle-class workers is now dominated by technologies that favor super-skilled, superordinate workers. A large mass of mid-skilled jobs has been eliminated and replaced by relatively fewer jobs, with super-skilled elite professionals, in glossy jobs, dominating the industry and deprofessionalized, low-skilled support staff, in gloomy jobs, playing only subsidiary roles. The labor market for finance workers has become polarized.
Home mortgage lending illustrates the transformation. Mortgages channel capital into the housing market by allowing people to borrow money in order to own and live in dwellings that they will eventually pay for out of future earnings. Mortgage lenders must decide how much to lend to which borrowers. The methods that lenders use to make their loan decisions determine how many and what sorts of workers they employ.
Home mortgage finance at midcentury revolved around banks that both originated mortgages and held and serviced the loans they made. These mortgages were issued through the efforts of a traditional loan officer. This was a mid-skilled, middle-class worker, charged with exercising independent judgment about the economic wherewithal and reliability of particular borrowers and the value of particular houses, to ensure that each distinct loan was providently made. The traditional loan officer based his judgment not just on brute facts (a borrower’s taxable income, a home’s loan-to-value ratio) but also on a broader situation sense concerning the borrower’s character and standing in the community.
Traditional loan officers exercised genuine discretion and carried substantial responsibility. The North Carolina Housing Finance Agency’s 1977 Loan Originator’s Guide, for example, described its “guidelines for credit underwriting” as designed “to indicate appropriate considerations in ascertaining [an] applicant’s creditworthiness,” adding at once that “these guidelines are not requirements or rules which apply in all cases.” Even debt-payment-to-income ratios were discussed in terms of what was “normal” and “appropriate,” including after “special consideration.” Loan officers could apply such guidelines only by getting to know their borrowers. For example, at Marquette Savings Bank in Erie, Pennsylvania—which maintained the traditional approach through the new millennium and is only now retreating from it—a loan officer, accompanied by one of the bank’s trustees, personally visited each loan applicant on the Saturday after a mortgage application was filed, to assess the viability of the individual loan.
Banks paid for prudent judgment and skillful discretion, tracking the accuracy of individual loan decisions. Loan officers’ careers were made or broken depending on whether the loans that they approved were in fact repaid. Finally, traditional loan officers possessed educational and social backgrounds commensurate to their solidly middle-class status.
Home mortgage finance operates in a profoundly different fashion today. The difference has transformed work in the sector, in two ways.
On the one hand, banks have sharply reduced the numbers of home mortgage loan officers required to process a given volume of loans, and the loan officers who remain have been distinctly—indeed transformatively—deskilled. Loan officers today do little more than help potential borrowers gather information and fill in forms: they are less professional bankers than collectors of machine-scorable data; they employ virtually no expertise or imagination; and their work emphasizes mechanical rote repetition rather than independent judgment.
Contemporary banks, by “basing [mortgage loan officers’] performance bonuses solely on volume” rather than in any way connected to the accuracy of the loan decisions, typically abandon even the pretense that these street-level workers exercise professional skill and judgment or operate on anything other than the model of an assembly line. Indeed, “high-speed” loan programs, which aimed to reduce application processing time by three-quarters, made any other approach practically impossible. As one senior executive said in an interview with Forbes, “A loan officer at a bank or a credit union is typically just the smiling face of the institution—the officer’s job is to accept an application that the borrower has filled out, and then hand it off to the underwriting department.” Banks recruit loan officers from a commensurately undistinguished applicant pool. Court papers filed in a dispute arising out of the recent financial crisis reveal, for example, that Bank of America employed loan officers “previously considered unqualified even to answer borrower questions.”
On the other hand, present-day home mortgage finance also involves a new and elite cadre of super-skilled workers. The banks that originate home mortgages overwhelmingly no longer hold them but instead pass the individual loans on to institutions that securitize them. The mortgage-backed securities that this process creates bundle the rights to receive mortgage payments from masses of borrowers and then divide the bundles into tranches that receive different repayment priorities and present different balances of risk and return. This enables the securities to be rated by credit agencies and then sold to investors.
The securitization process is immensely complicated, and the workers who construct, price, and trade such mortgage-backed securities are not mid- but super-skilled. Street-level mortgage loan officers nowadays have literally no idea what financial instruments are constructed from the loans that they help to close.
The roots of this transformation lie in profound changes in the financial technology that banks use to enable hom
eowners to mortgage-finance their houses. Developments in contractual and regulatory frameworks made it legal for mortgage-backed securities to be constructed and traded, economic developments that applied asset pricing models made it possible to value such securities, new information technologies made it practicable to trade complex varieties at scale, and new social technologies of elite labor made it both possible and practicable for financial firms to staff the institutions that administer securitization. The management of risk through securitization would be quite impossible without all these innovations.
These technological innovations have transformed the jobs that home mortgage finance sustains. Securitization requires super-skilled workers to design and trade the new securities and therefore greatly enhances job opportunities for superordinate workers who possess the required skills. At the same time, these innovations, once deployed, reduce employment for mid-skilled traditional loan officers. Errors in origination may in effect be corrected through securitization, so that securitization makes it less valuable to ensure that individual loans are providently made. The same technological innovations that upskill superordinate investment bankers therefore also, and indeed directly, downskill street-level mortgage loan officers.
The army of mid-skilled professional loan officers that once made mortgages has been eliminated, to be replaced with a polarized workforce. A rump of gloomy Main Street workers collect data to fill in boilerplate loan applications. And a small elite of glossy Wall Street workers “correct” for the inaccuracies of initial loan decisions by repackaging loans into complex derivatives that quantify, hedge, and reallocate the risks of improvident originations. Although the two types of workers formally belong to the same sector, their jobs bear almost no resemblance to each other, making home mortgage finance a poster child for technology-driven labor market polarization.
The Meritocracy Trap Page 22
