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The Ghost of Labor: Past, Present, and Future

The presidential race captured the attention of most during the 2020 election, but there was something else significant on people’s ballots last november. In California, voters had the chance to vote on Prop 22, a ballot initiative related to gig work companies like Uber and Lyft. The state had recently passed legislation that would have classified gig workers for these companies as employees, which would make the corporations pay for benefits and unemployment insurance. However, Prop 22 created an exemption for these gig companies (after said companies spent tens of millions in campaigning).

Now that it has passed, Lyft, DoorDash, and other gig corporations are seeking to enact similar exemptions nationwide. The results of this ballot initiative will reverberate for some time, but it also speaks to an issue that’s been fermenting for decades. The advent of the gig economy was the big story of the 2010s, but the nature and organization of labor has been shifting for a long time—and not necessarily for the better.

So, as the holiday season reaches its definitive end, we’re going to be examining the Ghosts of Labor Past, Present, and Future. To contextualize the changes in work happening today, we have to examine the “traditional” way of doing things. We’ll then cover how these norms started to degrade over the past few decades and what has replaced them. Finally, we can look ahead and project how the nature of labor will evolve in the future.

The Ghost of Labor Past

The postwar economic boom in the United States, which lasted from the 1940s to 1970s, brought along a model of employment that workers could expect in the labor market. As detailed in The Fissured Workplace, by former Department of Labor administrator David Weil, this era of economic history saw the rise of huge corporations and massive conglomerates. This was the golden age of companies like General Motors and General Electric—businesses that operated at scales previously unimagined and held subsidiaries in various, sometimes unrelated industries. This was a time when General Motors produced almost half the cars in the United States and conglomerates like Litton Industries simultaneously produced military hardware for the government and operated restaurants for the public. This new method of corporate governance created a highly-planned and stable economy controlled by a collection of corporate C-suites. These massive corporations were large enough to influence or directly control production and distribution markets—disregarding regular competition. Their largesse also led to a new phenomenon in work: the internal labor market.

Weil describes how massive corporations changed wages from a market rate based on supply and demand into an almost centrally-planned schedule based on company policy. Employers created very clear guidelines for who would be paid what, and these wages were based on things like years in the company and work performance. Corporations’ market power ensured their success, so they offered unparalleled job security. Also, the large internal network of management and work hierarchies gave workers ample opportunity to advance their careers within the company.

This system developed for several factors. For one, housing all the employees of an enterprise—the CEO, middle manager, assembly-line worker, and even janitor—in one firm gave workers opportunity to see what others were making. According to the psychological research Weil cites, this led to issues of pay fairness. If handled incorrectly, employees would complain that others were being paid more for the same job (a concern of horizontal equity) or that they were being paid too little compared to higher-ups (a concern of vertical equity). The solution to these pay equity issues was to create standardized wage schedules based on position and seniority. This standardization not only solved fairness concerns, but it also served as a better motivator than merit or performance-based pay. As Weil says, workers who believe their employers are fair and will give out raises over time put in much more effort.

Unions were a huge factor in these types of wage schemes. The postwar era saw the highest rates of union membership in US history, and labor leaders collectively bargained for higher wages. Weil explains that these gains in compensation were enacted through similar schedules of pay and similar seniority standards. Playing off the theme of equity, Weil states “the collectively bargained contract creates a transparent set of expectations of what is fair.” Thus, concerns of vertical and horizontal equity in unionized businesses were addressed by the workers themselves. The fact that it was workers—not just bosses—controlling wages likely explains why union employees to this day earn significantly higher wages. The power of unions in this era also had a spillover effect. Weil cites that many employers paid higher wages to stave off labor organizing. Unionization forced employers to compete for labor; if the pay wasn’t good enough, workers could move to a union enterprise.

Most importantly, unions and internal labor markets forced corporations to share their profits with workers. To set wages above market rates, companies were paying workers out of the bottom line; however, the tradeoff was worth it. Employees enjoyed high compensation, job security, and career opportunities. Many received pension plans and other retiree benefits. Employers enjoyed high worker productivity and a still-healthy profit margin. Everyone was happy, except for one group: the owners.

In The Fissured Workplace, Weil relates how the growth of massive corporations created large networks of management insulated from the concerns of shareholders or investors (“the divorce of ownership and control”). Since executives still got paid handsomely, they were okay with lower profits; however, investors were not. Profits are the basis of stock and equity value, so sacrificing the bottom line for higher wages was not in the owners’ best interest. Weil shows how, from the 1980s onward, investment groups and private equity firms grew in power, and they sought ever-growing profits to achieve higher stock prices. This trend is financialization, which I have also covered. As mentioned in my article, the banks and investment firms have coerced companies into pursuing one goal: maximizing shareholder value. The financial world hijacked the corporate one, and it brought an end to the golden era of labor.

The Ghost of Labor Present

Corporations, now forced to satisfy investors at the expense of workers, needed to find ways to increase profits. Increasing revenue was important, but companies would also need to decrease expenses. A key way to pad out the bottom line would be to reduce labor costs—meaning suppress wages and benefits. Such a task would be difficult, though. Employees would not give up their compensation willingly, and internal labor markets and unions still put upward pressure on wages. To get around these forces, large companies have adopted two overarching strategies: fissured organization and alternative employment.

Fissured organization, detailed in The Fissured Workplace, was motivated by the interests of Wall Street. Coerced by activist investors and institutional pressure, conglomerates and big companies split themselves up or shrunk themselves into “leaner companies.” Such lean companies would focus only on core competency (meaning the profitable parts of the business). For example, a hypothetical factory might employ four types of people: production-line workers, management, janitorial staff, and security guards. If that factory wanted to focus on core competency, they might at first fire their janitors and guards—replacing them with subcontracted labor from a different company. This organizational style is the subcontracting model of fissuring.

Under this fissured organization, we have two groups: the lead companies (the company on top, the brand name, the one that hires other firms) and subcontractors. However, these subcontractors are different than the ones many are familiar with. According to Weil, traditional subcontractors were individuals or small firms with highly specific skills. They were hired at construction sites or movie production lots to do specific, temporary jobs that couldn’t be done in-house. The new type of subcontracting work focuses on low-skilled labor that used to be done within the lead company, but now is contracted out on a continual basis. When lead companies contract out ancillary parts of business, the workers are taken out of the large firm. Right off the bat, they lose access to the equity concerns in the old internal labor markets. Subcontracting firms for janitorial or security work are much smaller companies. Workers could no longer look up the food chain to higher-paid employees, so vertically equity concerns are nonexistent.

Subcontracting firms also operate in a very different market setting than lead companies. There are very low barriers to entry for something like a janitorial firm, so many more companies can join the market to compete. We see a situation where there are many firms competing for the contracts of a few lead companies. Additionally, lead companies can easily replace subcontractors, but each subcontractor is very dependent on the business of the lead company. These firms are in a weak position, so lead companies have leverage to negotiate lower prices for services. If the subcontractors don’t like it, the lead company can pick from dozens of alternatives; if the subcontracting firm goes out of business due to low revenue, low barriers allow another one to take its place. Coerced to offer low prices, subcontracting companies survive on shoestring budgets, so their wages are much, much lower—and that’s the point. It’s the low pay that enables cheap contracts for the lead company. Overall, subcontracting allows lead companies to cut out workers from the business and lower their wages. Labor costs are suppressed and profits increase for the lead company—all at the expense of low-skilled workers.

However, subcontracting has grown past just ancillary labor. Numerous companies have subcontracted out the critical production processes of their businesses. In the old era Weil describes, the biggest companies like General Motors employed over half a million workers. Today, valuable companies like Apple have only 63,000 direct employees. It’s not that Apple needs drastically less labor, it’s that the company has contracted out all of that work to other firms. About 750,000 workers globally are involved in the production of Apple products and services, but most of these are employed under a fissured model. Modern lead companies subcontract out as much labor as they can, even if it's at the heart of their business model. Core competency for a company like Apple isn’t the production of iPhones, it’s the designing of iPhones. It doesn’t employ factory workers; it employs engineers and software designers. The lead company retains only what is most profitable—the brand and the right to collect revenue from product sales—and spins off all the expenses—operation of factories, production costs, employment of workers—onto other firms. In each subcontracting plan, lead companies cut workers out of the main business and force them into more precarious, less profitable firms. The end result transforms the labor model from wages for work to prices for services. Subcontracting firms are coerced into offering lower prices, which are sustained by lower wages for workers. Weil also explains how this isn’t just an outsourcing issue; companies like Hershey have practiced the same subcontracting model completely within the United States. Hershey handles the recipes and marketing, but subcontracted firms make the chocolate. No matter how far subcontracting extends through a company, though, it always moves workers from successful companies paying high wages to precarious companies paying low wages.

As Weil describes, franchising follows a similar model of companies pushing off the costs of business onto other companies but retaining the revenues. Franchising was always around for industries like fast food, but in recent decades franchising has seeped into hotels, janitorial work, and more. The basic premise of a franchise agreement sees franchisors offering a brand, business model, and logistical support in exchange for a cut of the revenue and obedience to corporate policies. It can be a good deal for franchisees, but it puts all of the risks of running a business onto them. It is the independent franchisee taking out business loans, buying supplies, and paying workers—not the company whose logo is on the building. Similar to subcontracting, this fissured system creates lower tier firms in precarious conditions. Franchised businesses run on small margins, especially because of the revenue cut and other fees they give to the franchisor. This condition—combined with the fact that workers cannot look up the chain of command to see vertical equity concerns—puts downward pressure on wages. Corporations like Hilton or McDonalds might make millions if not billions in profits, but the small franchisee operator certainly isn’t. The last model of the fissured workplace in Weil’s book is supply chain management. If subcontracting pushes off the costs of production, then supply chain management pushes off the costs of transport and distribution. Traditionally, the shipping of products and resources was done in-house by major companies, but modern companies utilize outside logistics firms to accomplish this transit. Despite the fact that they are different companies, though, they are all competing for the limited contracts offered by big corporations. Logistics firms have to accept large degrees of oversight and rulemaking by lead companies; their status as independent companies is limited. To compete, they also have to offer lower prices—big companies have the same leverage they have when subcontracting. Once again, these prices are subsidized by low pay.

The overall outcomes of fissured business models are wide-reaching. Downward pressures on wages keep workers’ incomes stagnant or even decrease them. In many cases, workers are even cheated out of their earnings through wage theft. Weil dictates how fissured industries have much higher rates of crimes such as not paying for all hours worked, refusing to pay overtime wages, and paying below minimum wage. Fissuring puts lower-tier companies in such economic peril that they need to break the law in order to stay in business. The lead companies aren’t that concerned because they are usually immune from the criminal penalties and able to find another firm to work with. There’s also less money to go around for worker safety; fissured industries have much higher rates of OHSA violations than non-fissured industries. Benefits are also threatened. Fissured companies are much less likely to offer health insurance, retirement plans, and other benefits because they lack the money. In some cases, industries have used subcontracting to discharge pension responsibilities. For example, coal mining companies in West Virginia have attempted to transfer responsibility for pensions to subcontracted firms. This ploy would let big mining corporations discharge any of the costs of pensions, all the while putting worker’s retirement benefits in jeopardy if their small, precarious subcontracting firm went under. In short, fissured business structures force workers to accept worse pay, worse working conditions, and worse standards of living.

The other major trend in labor is the rise of alternative employment (sometimes referred to as indirect employment or informal employment). This style of labor takes many forms: temp work, independent contracting, freelancing, gig work, and more. Whatever the specific form, though, the underlying similarity is how alternative employment treats workers as individual units separate from the company. The workers are no longer employees or formally tied to the business at all. Alternative employment has grown rapidly since the fall of the golden era of labor. From 2005 to 2015, a study by Harvard and Princeton professors showed that the share of workers in alternative employment grew from around 10 percent to 16 percent. Even more surprising, they say “all of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements.” In 2018, a different study found 20 percent of American workers work under contract. This trend will only accelerate. The same 2018 study found that half of the workforce would be contractors and freelancers within 10 years.

Alternative employment has created a multitude of problems for workers. Upward mobility is one of the most obvious problems. In the golden era, workers could stay with a company and work their way up the ladder to higher pay and higher status. When workers are forced outside the bounds of a company, they are no longer on the ladder at all