A year before I applied to grad school, the name of the program I was applying to was changed from “Leaders for Manufacturing” to “Leaders for Global Operations” to align itself better with the modern business world.
When I started the program in 2010 it was at the beginning of the economic recovery and there was a lot of excitement at MIT around investing in manufacturing and “bringing back” good jobs to the economy. In 2010 bringing back manufacturing jobs was and earnest idea taken seriously by many. It also fit with a general narrative of the US economy and the good middle-class jobs that were created for decades.
However, the name change should have been a clue that the economy had moved in a new direction. The jobs were not coming back.
Manufacturing recovered in the US in economic terms and in many places across the world, but it turned out that it didn’t translate into jobs. The jobs lost in the 2008 recession are never coming back.
The FRED database for the US even stopped tracking the percent of the total workforce, which as of 2019 is a mere 8.6% and has been around that level for almost ten years.
My experience starting my career working in manufacturing and then shifting into consulting and now as a self-employed researcher and consultant has convinced me that the economy has undergone a profound and permanent shift over the last ten years.
Tech firms took over the economy but still only dominate a small number of cities
When I graduated college in 2007 “working in tech” was barely something that people thought of. Now it is the goal for any driven young person.
We are in a new paradigm, but are left with many of the cultural ideas and assumptions of the old model and I’m concerned that more people have not caught on to this new reality.
Our cultural and political norms about how we think about work have become awkward. Bringing back manufacturing jobs went from serious policy idea to pandering nonsense to the coal industry.
We see divisive debates around the world about how society and the economy should be structured including how money is distributed, how immigration factors into labor force decisions, benefits for gig workers, what types of jobs there should be and how we think about the tension between meritocracy and egalitarianism.
These are big questions and will likely take a decade to settle, but at the core of all this is something that no politician will ever tell you:
Within the current way we think about work and employment, we will not be able to guarantee economic success to the average person through the “job.”
This is because most people have not updated their model of the new world of work. While Mark Andreesen was one of the first to explain clearly that “software is eating the world,” Ben Thompson was the first to clearly explain how that transformation would take place and what the firms would look like.
In 2015 he coined “aggregation theory” which helps how tech firms have been able to take advantage of software to reach customers at a global scale. Through this thesis, it is easy to understand why tech companies have surpassed and dwarfed traditional industrial companies such as Exxon, GE and BHP Billiton. Apple and Microsoft alone are now more valuable than the top 10 companies in 2009.
Look at the difference ten years makes and you can start to see how our entire economy has shifted:
Thompson’s thesis argues that that technology enabled “aggregators” to reach customers through the internet at zero marginal cost (meaning the cost of reaching an additional customer is negligible) which enabled companies with great technology to capture all of the demand within a market.
Instead of going to 100 different retailers online, we go directly to Amazon.com. Amazon has aggregated demand, which enables them to aggregate the supply and build unimaginable scale with limited competition.
For the average person, just see how many days you can go without using Google, Facebook, Amazon, Netflix or Microsoft and you’ll start to see this transformation everywhere.
Without this transformation of the economy, our economy would be in a crisis. It is only because of the emergence of these new types of companies and the jobs associated with them that there are still a lot of good jobs available.
The Brookings Institute found that jobs in this “innovation sector” have led to steady increases in employment:
they have increased their share of the nation’s total innovation employment from 17.6% to 22.8% since 2005.
However, this is not the lifting all boats kind of job growth. Most of the employment gains have happened in a small number of regions:
Most notably, just five top innovation metro areas—Boston, San Francisco, San Jose, Seattle, and San Diego—accounted for more than 90% of the nation’s innovation-sector growth during the years 2005 to 2017.
With this innovation being so concentrated in a number of regions, it has also been the case that the increase in good jobs has also been concentrated in the same regions.
This takeaway: The economic success of successful firms in the new economy has not meant widespread prosperity across the nation through increased employment. It has enriched a certain type of educated professional who is well positioned to land these coveted jobs.
Superstar firms create great jobs, but need far less people than firms of the past
In the past few years, economists have identified a clear emergence of a “superstar firm” effect that larger firms seem to be capturing an increasing share of profits in a given industry. Here is how Harvard Economist Larry Katz puts it:
The basic idea is that, industry by industry, large firms are becoming increasingly dominant…In almost every industry, the largest 20 producers, the largest four producers, the largest single producer seem to be increasingly important. And the higher up you go, the bigger. So there’s growing concentration of economic activity in what we call superstar firms, the top firms in each sector. In many cases, those firms cross many industry boundaries. Amazon, for example, is in lots of product markets.
Many of these firms have been at the center of the “innovation economy” and if you happen to work at these companies, you have likely been able to cash in on this transformation.
Here is a visual showing this shift starting in the 1990s when the top 10% companies start to become the only ones with steadily increasing wages:
Another analysis looking at the top 100 firms among US public companies show that the top 100 firms were able to capture 31% more of the overall profit from 1995 to 2015.
There are two explanations. One is a trend of increased consolidation and less competition seem in many industries and the second is the fact that these dominant firms have had better technology, enabling them to capture enormous scale advantages which then enable them to control market power.
This transformation has scrambled our understanding of the labor market. While there has been a clear decrease in the labor share of income broadly, this is not because workers have lost bargaining power over wages, it is mostly because these superstar firms need fewer workers that their industrial predecessors. Here is Katz again:
We found that throughout the economy, the majority of the decline in labor share is this reallocation effect. The total sales, or value-added, in the economy is shifting toward these larger superstar firms—that’s what the growth of concentration shows—and these firms have lower labor share than the average firm. So most of the growth in the decline of labor share is this between-firm reallocation effect.
This gets to why I am so interested in work. We pretend as if this larger shift has not happened and that massive market caps mean that there are bountiful jobs being created everywhere. The associated belief is that putting your head down and working hard is still a good life strategy.
Working for a brand name company no longer cuts it. Finance, tech or go home.
It is the greatest time ever to be a young person if you have the right credentials and social capital to take advantage of this new economy.
Scott Galloway is a former entrepreneur turned NYU b-school professor who has noted that “things have changed dramatically” in terms of how his students are thinking about employment and notes that the standard business school curriculum is setting people up to fail:
to a certain extent in my department, the marketing department and the marketing department of every top 20 business school the curriculum is quite frankly training people to go get a job at Heinz and get laid off two years later
Despite this, students are still getting their money’s worth because the highest paying companies recruit a large number of people from MBA programs. Galloway gives us a glimpse of this reality as well as his concerns for the impact on the broader culture and society:
in the reality at NYU its still a great buy, we’ve decided in our society that the only people that get to innovate or capture shareholder value are monopolies – Amazon, Apple, Facebook, & Google – and the only people that get to work for monopolies are people from top 30 schools and the only people that get to go to top 30 schools are children of rich kids, where there’s more from the top 1% at these schools than the bottom 60%…
As someone that got an MBA, one thing people don’t realize is how flexible people are in terms of job opportunities. It is not uncommon for students to apply to 50+ jobs across many industries, regions and functions. The whole game is to get a high-paying job. Ideally something you like, but thats often negotiable.
Top b-schools are more about gaining access to inside information about where high-paid jobs are in the new economy rather than any transformation academic experience. If you operate in these circles, you’ll know details like annual salaries, number of stock options, raises and future promotion opportunities down to a level of detail that would impress most people.
For the past twenty plus years, finance and consulting have been the places to be if you wanted to cash in on the prosperous American economy. Both have been able to cash in on the globalization opportunities of increasingly powerful (and large) firms. Technology took it to a new level with zero-marginal cost economics and now have become the best places to work if you want to get paid in the new economy.
Don’t worry about wall street though, they’re still making it work:
If you are a worker in these areas, it is an amazing time for you and if you take inventory of the people in your life who are doing well, they likely work in technology or finance.
For technology, the numbers are staggering. With less than two years experience with coding skills, here is what you might be able to make working in tech:
This is with little to no experience!
For the small percentage of people outside of tech who own stock, they have been able to earn a dividend on this growth even if their firm or job has had more stagnant income growth.
For others, the best move to take part in this new economy and have a good job is to move into tech or to move to a superstar city. Unfortunately, most people just don’t want to move or make a radical career shift.
The Solo Opportunity & The Reality Of An Economic Model Without Enough Jobs
In my last three years being self-employed, I’ve realized the tremendous opportunities this shift gives people who are are comfortable creating online and tapping into the potential of reaching 4 billion people across the world.
It clicked for me over the last year when people from more than 28 countries enrolled in my strategy consulting skills course. The most stable opportunities over the next twenty years may be the people who want to trade uncertainty in the short term for a bet that this new economy is here to stay.
Once you see this shift happening it is hard to un-see. Despite the fact that my previous consulting job paid a lot more, I was consulting for companies that were stagnant and struggling. They were paying us for “transformation” projects but really they were just hoping that we had some answers to slow their inevitable decline.
At first I wanted to leave my job to escape the corporate world. Now, through different work I’ve done it is more about a bet that what I am learning will give me more flexibility AND opportunity in the future.
But I’m lucky. My parents encouraged my obsession with computers and never complained when I took over the phone for hours to build terrible websites on geocities, trade basketball cards and beanie babies on ebay or play with proggiez on AOL. I think back to those times when I am writing this newsletter, building my course on Teachable, experimenting with making videos on YouTube or making video calls on Zoom and laugh a bit because it seems so clearly connected in a way that I did not see until I took this crazy leap.
Unfortunately, most people don’t get a kick out of technology. As much as Venture Capitalists with full-time jobs write impressive manifestos about the “passion economy” most people don’t want to spend all day on a computer trying to figure out how to build marketing funnels and optimize facebook ads. That’s just reality. Nor do most people want to constantly think about their career or have to move cities and jobs constantly. They have other more important things to do like raising a family.
Unless you are in an elite city or superstar firm, the days of blindly working hard and being taken care of are over. Your parents might have told you to go work for a company like GE, 3M or Procter & Gamble and that the rest would be taken care of, but that world is gone. The industrial age is over.
The current economy creates magnificent high-paying tech jobs in a small number of cities. We focus on these as proof that we have the greatest economy in the world despite numbers showing that since 1990, the US continues to increase more jobs that pay below the median wage than above it.
Despite these shifts, more people are college educated than ever and are choosing to go head-first into the new economy, trying to re-create the success of the most successful generation.
Nevermind that the houses, healthcare and education are much more expensive. The biggest shift has been that no one can count on stable employment from any employer. Everyone accepts that the threat of layoffs is real even at the best of companies.
This has led the millennial generation to place even more emphasis on work as one of the most important things in life. Derek Thompson calls this workism:
It is the belief that work is not only necessary to economic production, but also the centerpiece of one’s identity and life’s purpose; and the belief that any policy to promote human welfare must always encourage more work.
Some have seen this as a indictment of a generation that doesn’t value the right things in life. Yet they miss that we operate in a wage-based world and that for a long time it created an accidental and temporary stability through jobs that enabled many to gain trust in the system.
The old economy was about jobs. The new economy isn’t going to provide those jobs as easily. If you want to go after the good jobs, its going to be a helluva lot more stressful. And for the people that don’t land those jobs? We have to be more empathetic and compassionate towards them. We are in a new economy in which the idea that if someone doesn’t have a good job they didn’t try is outdated nonsense.
We need to think about what we can offer the world outside the container of a job. Rusty Guinn puts this more eloquently in his essay “In Praise of Work“
Your work supersedes your job. Your work will often supersede your passions, because it isn’t a thing you feel. Your work is what you do with the gifts of life, talent, intelligence, fortune and strength you have been given. Be shrewd, but where you have the power to do so, reject any who would tell you to squander them.
Its time for us to wake up. We need to call bullshit on politicians promising us more coal and manufacturing jobs. They aren’t coming back.
33k+ Sold! (Top 1% Book) The Pathless Path is Paul's book about walking away from a "perfect" job with a promising future and starting over again. Through painstaking experiments, living in different countries, and a deep dive into the history of our work beliefs, Paul pieces together a set of ideas and principles that guide him from unfulfilled and burned out to what he calls "the pathless path" - a new story for thinking about work in our lives. Learn More & Buy The Book Here