Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the US and Denmark

Daron Acemoglu is Institute Professor of Economics at Massachusetts Institute of Technology; Alex He is Assistant Professor of Finance at the University of Maryland Robert H. Smith School of Business; and Daniel le Maire is Associate Professor of Economics at the University of Copenhagen. This post is based on their recent paper.

Over the last decades, there has been a decline in the labor share and stagnant wage growth in many advanced economies. In a new working paper, we argue that changing managerial attitudes and practices towards rent-sharing have been a major contributing factor to the decline in the labor share and slowdown of wage growth. In particular, we focus on the role of business schools, which have been one of the most important institutions defining the ultimate ends of the corporation. We document that the appointment of managers with a business school degree (“business managers” for short) leads to lower wages and labor share at their firms.

We collect detailed data from both the US and Denmark on CEOs’ educational background and match CEOs to firm-level and worker-level datasets. Our sample covers all publicly traded firms in the US between 1992 and 2014, and all firms with at least five employees in Denmark between 1995 and 2011. In both countries, the share of firms with business managers has grown rapidly over time. For example, in the US, the share of public companies with business managers has increased from 26% in 1980 to 43% in 2020.

We start by analyzing firms which switch from a non-business manager to a business manager. We compare the evolution of wages, labor share, and other firm outcomes of these firms with a set of control firms that always have non-business managers. We control for industry-year fixed effects, region-year fixed effects, and size quintile-year fixed effects to absorb industry-specific, region-specific, and size-quintile-specific trends. Figure 1 shows that in the US, wages decrease by 6%, and the labor share of sales decreases by 1.8 percentage points (translating into a decrease in the labor share of value added by 5 percentage points) five years after the appointment of a business manager. In Denmark, wages decrease by 3% and the labor share of value added decreases by 3 percentage points five years after business managers are hired. The results are not due to changes in firms’ workforce composition, and we find similar results when considering the wages of workers staying at the firm. However, we find no significant changes in value added, investment, or employment after the appointment of business managers, suggesting that business managers are not more productive than their non-business peers.

Figure 1. Caption: The Effects of Business CEOs on Wages and the Labor Share in the US

Taken at face value, our estimates suggest that the effects of business managers are sizable but not implausibly large. For the US, our estimates indicate that the increase in the share of business managers can explain approximately 20% of the decline in the labor share and 15% of the slowdown of wage growth since 1980. At the same time, the reduction in wages leads to higher firm profits and stock market valuations. In the US, we find an increase of about 5% in the stock market valuations of companies that appoint business managers. We also show that business managers benefit themselves: managers with business degrees earn more than non-business managers, all else equal.

One concern with our estimates is the endogeneity of the decision to appoint a business manager —firms may turn to business managers when they need to cut labor costs. We use two strategies to address this concern. First, we obtain similar estimates when focusing on manager retirements and deaths, where the timing is less related to the fundamentals of the firm compared to other switches from non-business to business managers. Second, we develop an instrumental variable (IV) strategy. We document a clear pattern of “diffusion” of the appointment of business managers within peer groups of firms in the same industry-region-size class cell. Using only this variation in the data, we also find that the hiring of business managers has robust negative effects on wages and labor share but no effect on firm output.

How do business managers reduce wages and labor share? We identify changes in rent-sharing as the primary mechanism. To measure the extent of rent-sharing, we focus on plausibly exogenous variation in firm profits driven by export demand shocks in Denmark. Our strategy compares firms that export different products to different foreign markets and exploits the differential evolution of overall (non-Danish) imports of specific products in these markets. We find no major differences in terms of productivity, sales, employment, or investment responses to export demand shocks—thus no compelling evidence that business managers are more productive or adaptable in response to exporting opportunities. However, we find a positive effect of export demand shocks on wages for firms headed by non-business managers, whereas the effect on wages is precisely zero for firms headed by business managers. We further show that is almost completely driven by positive export shocks: following an exogenous decline in exports, business and non-business managers behave similarly, presumably because cutting wages is costly. However, following a positive export shock, non-business managers share the resulting rents and raise wages, whereas business managers do not.

Finally, we explore whether the effect of business managers is due to the selection of individuals who are more prone to take a hard line against labor into business degrees, or whether instruction and socialization in business degree programs produce managers who do not share rents with their employees. We exploit the presence of “role model” effects in the choice of college majors—whereby students are more likely to follow the major choices of their role models. We define role models as students in the same high school and with similar academic performance, but one cohort ahead. Using the college major choice of role models to predict whether students enter business degree programs, we estimate that most of our wage and labor share results can be interpreted as a causal effect of business education rather than a selection effect.

Stepping back, we interpret our findings as capturing the impact of management practices and values imparted by business schools and business degrees. Although we do not have direct evidence on these channels, two ideas commonly propagated in business schools may significantly affect the priorities and approaches adopted by managers with business degrees. The first is the emphasis on shareholder values, as advocated in 1970 by Milton Friedman, who stated that, “The social responsibility of business is to increase profits.” Following Friedman, other economists and business school scholars started arguing that managers were not sufficiently devoted to maximizing shareholder value. These ideas became popular and started being taught in business schools. Under their influence, (some) managers started viewing workers not as stakeholders in the corporation but rather as sources of costs to be reduced. The second idea is the emergence of a business school doctrine advocating reengineering and creating lean corporations. Although the emphasis was not on wage cuts per se, identifying and removing “unnecessary” costs started being viewed as an integral part of successful management. The dual emphasis on shareholder value and corporate leanness may have made managers unwilling to share rents with their workers. Consistent with this interpretation, we tend to find larger effects for managers receiving business degrees after 1980, when these ideas were more popular and widespread in business schools. We plan to investigate what types of values and practices managers acquire in business education in future work.

The complete paper is available for download here.

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