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. Researchers from the Wharton Business School found that independent contractors are shut out from accumulating human capital: training in the industry, experience with new technology and tools, and general growth of job skills. From their article: “As an employee, your employer may pay to train you and keep you up to date on new technologies. They will also give you a chance to try new kinds of work and learn that way. As a contractor, nobody is paying for you to learn. They only want to hire you to do things that you have already demonstrated you can do elsewhere.” Keeping these workers outside the firm makes it harder for them to advance their careers. Instead of moving up the ladder, they get stuck on the bottom rungs.
Compensation is suppressed by the growth in alternative employment. One study from the Boston Federal Reserve found a significant negative association between informal work and wages; as more work turned alternative, wages grew stagnant. Alternative employment will likely suppress wages just like fissured employment. First, workers will be forced into isolated and precarious situations; then, they will be forced to compete with multitudes of other workers to get work from a small amount of corporate employers. The leverage is clearly in the corporations favor, and companies will use this leverage to set low wages. Outside of basic pay, alternative employment lacks the benefits associated with traditional employment. 51 percent of contract workers receive no benefits at all. Only 46 percent receive health insurance through their work (compared to 69 percent of traditional full-time workers). Only 32 percent of contractors have retirement benefits (compared to 60 percent of full-timers), and only 19 percent have pensions.
The trends in wages and benefits show how alternative employment has been exploited by companies to push the costs of employment from the owners to the workers. Instead of paying a decent living, companies can lower labor costs by suppressing pay. Employers push the costs of retirement and health care plans entirely onto the workers. Even the costs of managing taxes are pushed onto the worker. There are no longer the automatic deductions a traditional employee finds on their paycheck; workers must calculate their obligations on their own.
Alternative employment creates an entire class of workers in extremely perilous conditions. For many companies, temp work and contract work is hired out by the day; a job you have on Monday could be gone by Tuesday. Job security is nonexistent. There are also much less protections for alternative workers compared to traditional employees: no minimum wage, no anti-harassment and anti-discrimination protections, and no unemployment insurance. Many people working in alternative employment are not doing it by choice, either. An NPR poll found over a third of these workers are looking for a full-time position. A Federal Reserve study found a majority of them would prefer traditional employment. While there are certainly many who like alternative employment, a big driver of its growth has been increasing economic insecurity. Since the Great Recession, many have started working alternatively because they needed multiple streams of income to be financially secure. Research compiled by the Brookings Institution implies that many Americans were in alternative employment as a second-job. Now, the pandemic recession has created another wave of alternative workers because traditional jobs are no longer safe. It’s a vicious cycle: people turn to alternative work because their economic position is perilous but alternative work ends up being economically perilous.
One might accept these perils as the tradeoff for a life with more freedom and self-control. After all, being an independent contractor means you can be your own boss. Right?
Unfortunately, alternative employment often turns out to be the worst of both worlds. Companies take away the benefits of traditional employment and then take away the benefits of alternative employment, too. For example, truck drivers for XPO Logistics are classified as independent contractors. However, it’s not like the drivers can negotiate a price for their services. XPO dictates the pay. And the work and routes offered are all controlled and doled out by the company. These types of “independent” contracting setups are common across many industries; truck driving, janitorial work, ride-hailing, and even news media. These companies are some of the worst offenders of worker misclassification: labeling workers as independent contractors when they’re really just the same as an employee. Calling a worker “independent” implies they have some autonomy on pricing, what work they do, and how they do it. The new wave of misclassified workers have no autonomy and they have no protections afforded to employees (minimum wage, overtime, collective bargaining, and all the rest).
The erosion of autonomy has even extended to traditional, non-misclassified freelancers. Companies increasingly force non-compete clauses into freelancing contracts. These contractual agreements ban freelancers from working for a company’s competitors for a certain amount of time after the job. It may seem harmless, but these contracts can have devastating consequences. In a freelance industry like modeling, workers often have to sign these clauses with their talent agency. However, since the models are then banned from working for the agency’s competitors, they have two options: continue to work for the same agency no matter what, or leave the industry altogether. This coercion allows the agencies to get away with all sorts of abusive and unfair practices because the models have no alternative. As one model put it, “When someone contractually owns you, they treat you like they own you. These contracts allow agencies to get away with unimaginable behavior because if models don’t comply, they lose the ability to make money in their profession.” In recent years, these non-compete clauses have even spread to jobs like bartending, salon work, and food preparation. These workers, sometimes making under $10 an hour, cannot afford lawyers to challenge the contracts. They again face the ultimatum of putting up with a bad company or leaving the industry—sacrificing years of job training.
These problems are even more disappointing because a true form of alternative employment holds great promise for workers. The ability to be your own boss and own the fruits of your own labor is aspirational. If it was done in good faith, alternative employment could offer workers true autonomy and freedom from exploitation; however, the corporations in charge of the contracts and gigs don’t operate in such good faith.
Alternative employment and fissured employment are two distinct trends, but they follow the same logic and serve the same purpose. In both models, workers are separated from the company that controls the profits. They are forced into more perilous financial conditions. Workers lose legal protections and labor rights, and they lose autonomy over their work life. They suffer lower pay and scarce benefits, and they lose opportunities for career advancement. Companies transform workers from secure, well-compensated employees to isolated, precarious laborers. The lead company retains all their control of the workers—through subcontracts, franchise agreements, and more—but kicks them out of the business. With them gone, the investors and executives can keep all the money for themselves: solving the profitability problem from the golden era. No matter the fact that it was the workers who produced all the goods and performed all the services that made those profits—they’re all independent contractors or subcontracted employees now. They can be disregarded.
The Ghost of Labor Future
As mentioned before, fissured and alternative employment will continue to grow in the future. The trends are even spreading into unexpected professions like lawyers. If even lawyers can fall to these models of employment, almost everyone’s job is in danger. In the coming decades, more and more low and middle-wage jobs will become fissured and alternative, and even high-wage jobs will be converted.
To gain insight into our country’s future, we need to look at another’s past. Right before America embraced Reaganomics, the South American nation of Chile was experimenting with the same type of economic philosophy. After a military coup in 1973, Chile instituted a series of neoliberal economic reforms advocating free markets and small government. After 20 years, the country suffered outcomes that are frighteningly familiar.
Almost half of all workers were working for firms called microempresas (micro-businesses). These were very small companies that performed services like maintenance, security, marketing, and more. The microempresas relied on contracts from large conglomerates known as asociaciones de fondes provisioniales (mutual funds). The conglomerates, owned by the 10 richest families in Chile, paid the microempresas very little, so the companies only offered temporary work arrangements with low pay. Chileans faced insecure jobs, no benefits, and starvation wages. Whereas before Chile had a large amount of unionized, secure employment, the labor market had devolved into temp work for small subcontractors. The country had undergone both of the trends America sees today: fissured and alternative employment.
The net effects of this labor market transformation and neoliberal regime were catastrophic. Poverty exploded—rising from 28.5% in 1969 to 42% in 1989. It got so bad that caloric intake dropped for huge segments of the country, which increased hunger tremendously. Income and wealth inequality drastically increased. All of these crises derived from the same cruel logic: reduce labor costs to increase profits.
Now, we can be reasonably certain the situation in the United States won’t devolve to that extreme. There’s a large amount of inertia in economic trends, so we won’t see a 42% poverty rate anytime soon. But that is the direction we are heading in. We might not get as bad as 1990s Chile, but we will get worse. We have already been getting worse. Wages have barely changed since the 1970s. Meanwhile, the top 1% has seen their income grow by more than 200% since 1980. Given the known effects of fissured and alternative employment, it is clear that these trends are a key reason why wages have stagnated and inequality has exploded.
The realistic future that awaits America is an economy dominated by an ever-smaller group of mega-corporations. The corporations themselves will hollow out their staff, pushing every worker they can into some sort of subcontracted or franchised firm. Right now, that fissuring affects mostly low-wage workers, but we will see tasks like human resources, accounting, engineering, and more spun off onto subcontractors. Every part of the company except upper management could be in peril. Forced outside the profit-making company, these subcontracted firms will be pressured to cut or stagnate wages and benefits. Profit-sharing and equity concerns will be removed. With tight budge