Business school graduates are bad news for American employees, new report says
Workers lose out on pay if their company’s CEO is replaced by a manager with business-specific education, according to a new report published last week by the National Bureau of Economic Research.
Wages decline by an average of 6% within 5 years of a “business manager” assuming the reins of a company in the U.S., with the overall labor or wage share decreasing by about 5%. The report, which is based on data from the U.S. Census Bureau, also analyzed the same trend in Denmark, where it identified a 3% decline in both areas.
Low-skill workers fared the worst in both countries, losing a higher percentage of their labor share than their high-skill counterparts. The authors defined “business managers” broadly, but said in the U.S. it mostly meant someone with an MBA degree.
The report’s most recent wage data is from 2014 for the U.S., and 2011 for Denmark. As a result, it might not reflect how more recent cultural shifts—like the growing popularity of ESG principles —are changing business school curricula.
The authors of the report attribute losses for workers under business managers to differences in the way that companies share profits, specifically citing data from Denmark.
“It used to be the case that when a firm grew, it shared part of its growing profits with its workers,” the reporter’s co-author Alex Xi He, an associate professor of finance at the University of Maryland, told Fortune. “For [firms with] managers with a business education, we do not find a wage increase after firms grow in profits.”
He traces this trend in profit-sharing to business school ideology that began to take shape decades ago: the emphasis on shareholder values as advocated by Milton Friedman in the 1970s, and the doctrine that corporations should be as lean as possible.
If a company switches from one CEO without a business masters degree to another, workers don’t see a significant change in their wages. The same is true if a CEO without a college degree is replaced by one who has one.
Although it might be exacerbated for companies with business school managers, the authors say that their data aligns with a larger trend in the U.S. that has been happening for decades—the national annual growth rate of median wages has shrunk significantly since the 1980s.
“A smaller portion of the economic surplus is going to workers and a larger portion is going to either capital or profits,” He told Fortune.
Several factors could account for that change: the rise of automation, the emergence of big firms, market concentration, and the weakening of unions, to name a few. But the report posits that the proliferation of business school-educated CEOs and upper-level management, imbued with a profits-first mindset, could be a big factor.
“In the US, for example, where the fraction of workers employed by business managers has increased from 26% to 43% between 1980 and 2020, our estimates indicate that business managers can explain about 20% of the decline in the labor share,” the report reads. “They also account for approximately 15% of the slowdown of wage growth since 1980.”
Despite their growing prominence, CEOs and upper-level managers with business school credentials don’t actually increase a company’s profits or sales, according to He. “They don’t affect the size of the pie much, just how the pie is split.”
This story was originally featured on Fortune.com