Managers with a business degree reduce their employees’ wages

Managers with a business degree (“business managers”) reduce their employees’ wages. Within five years of the appointment of a business manager, wages decline by 6% and the labour share by 5% in the US, while both wages and labour share decline by 3% in Denmark.

A working paper1 by Daron Acemoglu, Alex He, and Daniel le Maire published by the National Bureau of Economic Research (NBER) in March 2022, discusses the contribution of a CEO’s education on the wages of their company’s employees, and therefore their contribution to wealth sharing in society.

The labour share of national income has fallen in several industrialized nations over the last three decades. In the US, the labour share in the private non-agricultural business sector used to hover around 65% between the 1950s and the 1980s but now stands at below 60%. Concurrently, the annual growth rate of median (real) wages, which was typically above 2% between the 1950s and the 1970s, has been only 0.3% since 1980, despite significant productivity growth. The bargaining power of labour has not receded as much in Nordic countries, which have a tradition of strong trade unions and various pro-labour institutions. Nevertheless, the Danish corporate sector labour share has also fallen from 69% in 1999 to 65% in 2014.

Many factors have been proposed as potential drivers of these pervasive changes in the nature of labour markets, including:

  • Capital accumulation
  • Automation
  • The rise of superstar firms.
  • Growing concentration and market power
  • Declining power of unions

The three main findings in the paper are:

CEO’s with a business degree reduce wages

In both the US and Denmark, when a chief executive officer with a business degree (“business manager” for short) takes over from a non-business manager, there is a significant decline in wages and the labour share of the firm (relative to non-business-manager firms).

In the US, where the fraction of workers employed by business managers has increased from 26% to 43% between 1980 and 2020, business managers can explain about 20% of the decline in the labour share. They also account for approximately 15% of the slowdown of wage growth since 1980. In Denmark, where the increase in the fraction of workers employed by business managers is smaller (rising from 11% in 1995 to 19% in 2011), they account for 6% of the decline in the labour share.

The reduction in wages following the accession of a business manager leads to an increase in profits: the return on assets (ROA) increases by 3 percentage points in the US and by 1.5 percentage points in Denmark. In the US, an increase of about 5% in the stock market values of companies follows the appointment of business managers. All else equal, managers with business degrees earn more than non-business managers.

Changes in rent-sharing is the major mechanism

Non-business managers are more likely to share any excess profits with their workers. Their rent-sharing elasticity estimates suggest that a 10% increase in value added per worker is associated with a 1.9% increase in wages. Alternatively, a 10% increase in profit per worker is associated with a 1% increase in wages. Business managers do not share equivalent rents with their employees, and for the firms they run, a precise zero impact on wages follows an increase in profits.

The aversion to sharing excess profits with labour is mostly acquired in business schools.

They explore in Danish data whether business manager effects are due to the selection of individuals who are more prone to take a hard line against labour into business degrees, or whether instruction and socialization in business degree programs produce managers who do not share rents with their employees. It’s the second.

Changes in Firm and Worker Outcomes around Non-Business to Business Manager
Transitions in the US. Fig 3. Op. cit.
Changes in Firm and Worker Outcomes around Non-Business to Business Manager
Transitions in Denmark. Fig 4 Op. cit.
Changes in Return on Assets and Market Value around Non-Business to Business Manager
Transitions. Fig 8. Op. cit.

The paper illustrates the fundamental dilemma behind a competitive economy and the model of the firm. A firm is an instrument to effectively produce and distribute goods and services. The more efficient the firm, the cheaper the service provided and potentially the richer the society. Yet, being jobs (and wages) the main access to wealth for the vast majority of people, the more profitable the firm, the poorer the people.

There are two ways to look at these interesting results. If we accept that wages are the main (in some countries, ever more demanded) route to wealth, the model of the firm should be carefully revisited. Alternatively, we can look at these results as a clear message that we should stop viewing jobs and wages as the exclusive or main route to wealth. Let’s transfer all those b-jobs to robots, and let’s look for a different way to distribute wealth. (And no, it is by no means my intention to rewrite the communist manifesto.)

In a later interview, last Otober, Acemoglu discusses their findings. Here is the key remark.

I would suggest two sets of avenues for further thought. One is however powerful a business leader is — or even a political leader is, even a dictator is — their power is embedded in the norms of society. If the norms of society are not permissive, you’re not going to be able to do this sort of thing. Emblematic of the forces that we’re talking about is people like Jack Welch. Jack Welch was as powerful as any C.E.O. would be, and he is an example of C.E.O.s that have cut wages and so on. But Jack Welch would not have been able to do what he did if society wasn’t accepting — his friends and neighbours, his shareholders — were not accepting of the policies and management style that he brought. What is it that their friends, their country-club peers are going to say? “Yes, it is acceptable. Kudos,” or they’re going to say, “No, no, you’ve gone too far.” And second, what is it that we really teach people in these positions of power? So that we come back to syllabi, we come back to subtle cues that people get in business schools or in other similar environments, including perhaps in management consulting firms.
It’s the power stupid!

In other words: It’s the power, stupid!


(1) Acemoglu, Daron, Alex He, and Daniel le Maire. ‘Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the US and Denmark’. Working Paper. Working Paper Series. National Bureau of Economic Research, March 2022.

Featured Image: DonkeyHotey, Jack Welch – Caricature

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