Q&A with MIT’s Zeynep Ton

Zeynep Ton is a professor of the practice in the operations management group at MIT Sloan School of Management and president of the nonprofit Good Jobs Institute. American Compass executive director Oren Cass asked her a few questions about the responsibilities that corporations have to workers as well as the steps that business leaders and policymakers can take to create “good jobs.”

Oren Cass: You identify four “basic needs” that good jobs provide: pay and benefits that are fair, competitive, and meet workers’ needs; stable and predictable schedules with adequate hours; a career path offering clear and fair advancement to higher pay; and safe conditions and security that you will keep your job if you perform. How has the American economy been performing on those criteria over the past couple of decades? Are existing jobs improving or regressing? Are new jobs getting better at meeting them?

Zeynep Ton: It is hard to give a passing grade for pay, benefits, and schedules. Even in the pre-COVID world of low unemployment—just last year—32% of the workforce—46.5 million people—worked in occupations with a median wage below $15 an hour. A single parent working 40 hours a week at $15/hour would make $2,580/month. Using MIT’s living wage calculator, that’s $494 less than the rent, childcare, transportation, food, and medical expenses. And that’s not even counting personal care, clothing, leisure, housekeeping supplies, phone bills, or unexpected expenses.

Low hourly wages do not even tell the whole story. We need to look at the total take-home pay because the two largest employers during the last 15 years—retail and food services—are notorious for unstable schedules. Hourly employees, including full-time employees, are often scheduled too few hours to get by, work different hours week to week, and are given schedules with short notice—as short as 48 hours. As one hourly manager told me, “You don’t know from week to week how many hours you’re going to have but your bills are still the same …. You can’t even make enough money to pay your internet fee. I need a second job, but the way they schedule me, every time I get a second job, I can’t hold onto it.”

Two trends are at work here. New technologies let companies match labor supply with variable workload in increments as short as 15 minutes. Meanwhile, executive compensation is tied to stock price and executives fear shareholder activism. So they try to meet short-term earnings targets at all costs and in service industries that destabilizes schedules in two ways. First, to increase short-term sales, companies add promotions or make last-minute changes that cause variability in the workload, which in turn leads to schedule variability. Second, companies cut payroll by reducing hours.

What worries me is that we seem to be heading for worse performance. Growth in US jobs is expected to come from low-wage occupations such as health aides, food and cleaning services, and laborer occupations. When you look at the Bureau of Labor Statistics’s top 20 highest-growth occupations—which account for 55% of projected job growth—most pay below the median wage. These jobs are important for our society, but unless we find a way to transform these low-wage jobs into good jobs, the working poor will grow in number and Americans—especially those without a college degree whose real wages have decreased during the last four decades—will remain frustrated. Business groups like the Business Roundtable and the President’s Workforce Advisory Board promote two approaches—upskilling and education. Those are necessary but far from sufficient. Focusing on the supply side (not enough qualified workers) misses the more important problem on the demand side (too few good jobs). But in fact, there already is a better way.

OC: What dictates the kinds of jobs the economy creates? To what extent are the labor market’s challenges structurally and technologically driven; versus the result of policy-related choices in areas like trade or immigration or organized labor; versus a function of cultural assumptions and defaults in the business community and the wider society?

ZT: I’m an academic, so of course the answer is all of the above. But cultural assumptions are worth special attention—specifically, assumptions about workers and the work they do. Thanks to the COVID-19 pandemic, we’ve seen how important the people working in fulfillment centers, retail stores, meat plants, and nursing homes are. We all know we’d be in trouble if they weren’t still doing their jobs. That’s why they’re suddenly known as “essential workers.” But you’d never guess how “essential” they are by looking at their paychecks.

How can millions of workers be “essential” but only worth $12 an hour? When I speak with executives, it’s clear that many don’t understand the work that takes place on the frontlines of their companies and the reality of living paycheck to paycheck. Some believe their workers are lazy, avoid responsibility, and are unreliable. One CEO told me, “We already pay more than average to people who have limited skills.” If you assume your workers are unskilled and unmotivated, it’s easy to justify low pay and low investment. In some contexts, it’s also possible to design their jobs in a way that requires little skill and motivation. Think about Henry Ford’s assembly line a hundred years ago, where workers performed a narrow task over and over again, made no decisions, did not order parts, and did not inspect for quality. We’ve learned since then that using people as interchangeable parts was not the best way to make cars. But it took a while for the industry to change.

I have to point out that it also matters who these workers are. People of color and women tend to be overrepresented in low-wage jobs, and there’s already a long history of seeing both groups as being of less value and deserving less. For example, 25% of personal health aids and 37% of home health aides are Black, and this work is seen as low skilled care work. But a recent study shows that if we paid nursing home workers just a dollar more, we could save a lot of lives.

OC: You work a lot with corporate executives on their own employment policies and practices. What surprises them most? What don’t they know about their own companies and their own workers? What options have they not even considered?

ZT: Of course, they know what they pay by the hour, but they are often surprised by how inadequate take-home pay is. The nonprofit Good Jobs Institute helps executives calculate the distribution of hourly workers’ annual take-home pay and compare it to their budgetary needs, using the MIT living wage calculator. Many executives had no idea that even full-time employees weren’t making enough to live on. They think that what they’re paying must be okay because it’s in line with the market, but benchmarking against a sea of mediocrity doesn’t cut it.

The other surprise is how important basic needs are for low-wage workers and how much financial insecurity affects their ability to do a good job. Executives often use the wrong data to evaluate job quality and conflate culture and certain benefits with good jobs. They look at engagement surveys or at “Employee of the Week” or at cool but nonessential benefits such as wellness programs. But those don’t pay the bills—and many workers making close to minimum wage are not going to take advantage of discounts on ski passes. When we help those same executives examine what’s driving turnover—always a big problem for them—it almost always includes low pay, unstable schedules, and lack of career paths.

When people don’t make enough to pay their monthly bills and have no slack for a broken cell phone or a flat tire, they are constantly stressed and have reduced cognitive ability, mental health, and physical health. Not surprisingly, they find it difficult to move up because they have attendance problems, can’t focus on the job, and have poor performance. All of this, of course, feeds executives’ assumptions about how unskilled, unmotivated—and therefore low-value and replaceable—these workers are. But it’s a circular argument. Put any capable person in a position where she must work two jobs, can’t pay her bills, and receives little support from management, and you’ll get mediocre or poor performance. What executives often miss is that wages don’t just reflect the quality of employees’ work, they powerfully affect it.

The third surprise for executives is the cost of bad jobs. Many know that turnover and poor attendance can be expensive, but very few have calculated those costs. Turnover and poor attendance also cause operational and customer service problems, which reduce sales and profits. Reduced profits then prevent companies from investing in workers, which causes even more instability for companies and their workers. If that sounds to you like a vicious cycle, you’re exactly right. Understanding all of these costs requires a systems view. You can’t just say, “We had this much shrink” or “It costs us this much to make each new hire.” You have to look at operations, customer service, and hiring and training costs altogether. But large companies often operate in silos and rarely do this kind of comprehensive analysis with quantitative and qualitative data. They just “swallow” these problems, but they have no idea how much they are swallowing and how poisonous it eventually is.

OC: Why does corporate social responsibility seem to focus so much on questions of “sustainability” and “diversity” and so little on the substantive matter of good jobs that seems more important to most workers and their families and communities?

ZT: Sustainability and diversity are important, but the lack of emphasis on good jobs is what drives me crazy. I was on a panel with the CEO of a restaurant chain who said he wished his customers cared as much about the treatment of his employees as they did about the treatment of chickens.

I think it would help focus people’s minds on good jobs if we had widely accepted metrics. In an ideal world, companies would at least look at employees’ basic needs—but even those data are not easily accessible. Boards and investors rarely ask about such measures. But they do ask about sustainability or diversity, so that’s where executives focus. And even when it comes to race, diversity, and inclusion, the focus is often on metrics such as the number of people of color on Boards or in the C-Suite (obviously these are important) and less on the quality of jobs people of color hold and ensuring their jobs pay a living wage and allow them to live with dignity.

Offering good jobs is also hard, especially if profit margins are low and labor costs are a big chunk of total costs. Right now, the overall system of corporate governance doesn’t give CEOs enough incentive to take that on. Quite the contrary. Let me elaborate.

Good jobs require operational excellence, which involves a laser focus on creating value for the customer and on continuously improving the business. These are both hard to do for public companies, which are expected to—you know what I’m going to say—maximize value for the shareholders. A CEO whose compensation is tied to stock price and who is under pressure from the board, investors, and analysts for short-term results are likely to favor faster and easier ways to grow sales or reduce cost, even at the expense of customer experience or operational excellence. For example, growing quickly without a strong bench of unit managers will look like “meteoric growth” for a while, but then bog down in a quagmire of inadequately run branches or units. Sales promotions in retail may indeed boost short-term sales, but they also cause supply chain variability and increase the workload at the stores. That increases costs, destabilizes schedules, drives turnover, and reduces service—which will at best undermine sales gains and often overwhelm them in the long run. Cutting staff does indeed lower costs—good for the quarterly earnings report—but will also cause employee burnout and degrade customer service. Investments that would create value for customers but that won’t yield a return quickly, won’t be made unless the board or investors ask for them.

OC: There seem to be two different concepts of corporate responsibility that get frequently conflated. One is the idea that behaving more responsibly is better for the bottom line and so businesses should do so on behalf of shareholders. The other is that businesses and their leaders have obligations beyond the bottom line and should make different tradeoffs than they have in the past. When are “good jobs” compatible with maximizing profit and when do we need to go further?

ZT: Good question. In a recent paper, my colleague Hazhir Rahmanidad and I find that good jobs are profit-maximizing—as long as you can design the work in a way that improves the productivity and contribution of workers through empowering them, cross-training them, and involving them in improvements. That’s a string of if’s, but they all matter. You probably can’t design the work of a tollbooth attendant to meet those criteria, and those types of jobs should be automated. But in many other contexts—more than most people think—you can. And I’m not saying that because it seems plausible to me. I’m saying it because that’s exactly what companies like Costco, QuikTrip (a Tulsa-based convenience store chain with gas stations), and Mercadona (Spain’s largest supermarket chain) have been doing—very successfully—for decades. By the way, this type of work design is important to making a job a good job because it shows respect for workers’ time, knowledge, and ability; enables achievement; and makes the job meaningful.

The moral case can be just as compelling. When Aetna’s CEO, Mark Bertolini, found out that many of their fulltime call center employees were relying on government assistance and could not even afford Aetna insurance, he was surprised. But more than that, he found it morally wrong. They did an analysis of all the potential benefits of raising wages—reduced turnover, better attendance, ability to focus on the job and therefore offer better service, and so on. The numbers convinced them that it made sense to raise wages so, in 2015, they raised the minimum wage from $12 an hour to $16 an hour. So that’s a case of a CEO finding it morally wrong to pay employees less than a living wage and then justifying his course of action financially.

But let’s take this further. What if the numbers didn’t justify the investment? Then I think the answer depends on cost structure. At JP Morgan Chase, for example, where profit margins are big and low-wage employees account for only a small portion of overall costs, ensuring that everyone has a living wage is not that hard. We should expect these companies to provide all employees a living wage. We should expect the likes of Facebook to ensure that their contractors earn a living wage. They should just do it.

OC: At a minimum, it seems safe to say that businesses will not consistently deliver good jobs on their own. What can policymakers do to be most helpful in pushing them in that direction—either through direct regulation or broader action that might change the context in which they operate?

ZT: Well, it is clear that we can’t rely on business leaders alone. They need a context that pushes for good jobs. That context will likely require more worker power and strong public policy.

On the policy side, there are both carrots and sticks. The sticks include higher minimum wages and legislation for more predictable schedules. Both would force companies to look for ways to improve employee productivity and eliminate unnecessary variability that undermines job quality and company performance. Increasing the minimum wage does not seem to have a negative effect on employment. But even small increases can improve worker well-being in the form of fewer unmet medical needs, better nutrition, less smoking, less child neglect, fewer low-birth-weight babies, and fewer teen births. In other words, investing in good jobs is also investing in public health and community vitality, not to mention lowering the number of Americans that rely on government assistance to make up for their poverty wages. There are ways that scheduling legislation could backfire—for example, employees getting fewer hours or finding it hard to make changes to their schedules when they have an emergency—but these could be minimized if legislators involve companies in the process.

Carrots include changes to the tax code to favor investing in workers (better wages and benefits) rather than in automation. Policies could encourage disclosure of turnover and annual take-home pay for hourly workers. Other policies could encourage investors to hold stock longer in order to discourage the short-termism that prevents executives from investing in workers.

Investors can also help. What has been most surprising to me during the last few years has been how some leaders—even after seeing the evidence that good jobs can help them financially and competitively—have not yet made employee investments. Why? They don’t dare risk a short-term dip in profitability. They fear that they may lose their job or that their and their colleagues’ compensation might suffer because investors will punish them. Many executives don’t last long enough to dedicate themselves to such long-term change. In 2017, the median tenure of a CEO was just five years. If investors started asking probing questions about turnover, take-home pay, schedule stability, and career paths, companies would start paying attention.

As for business schools, we have some walking back to do. We’ve been teaching that the sole purpose of a corporation is to maximize shareholder value at all costs. It is time to start teaching how to make decent profits decently. I’m also a big fan of encouraging students to spend time working on the frontlines to change their assumptions about workers and the work they do.

OC: What are the metrics that best tell managers, and outsiders holding them accountable, whether they are in fact creating good jobs?

ZT: First is annual take-home pay distribution—not just average or median take-home pay. Second is employee turnover, and finally, the percentage of managers who are promoted from within. The last one is key because it shows opportunity, which is important for employee engagement and for the promise this country has always represented. Companies like Costco and QuikTrip target 100% internal promotion for frontline managers. That forces them to invest more in the development of their workers.

Ideally, both annual take-home pay distribution and internal promotion would be disclosed by race and gender. Most retail jobs pay less than a living wage—the average hourly wage for a cashier is $11.37—but Black retail workers make 75 cents on the dollar to white workers, are more likely to be part-time even if they want fulltime hours, and are less likely to be promoted: while 18% of cashiers and 12% of salespeople are Black, only 10% of frontline supervisors are.  These are the diversity stats we need to encourage companies to improve right away.

Disclosing these data can be embarrassing, but it has to be faced. If you only transform some people’s bad jobs into good jobs, you’ve made the other people’s bad jobs even worse.