MBAs in management lead to lower employee pay, study finds

Rivai H Tukimen

Whether professional business education is useful has been a hotly debated topic ever since the first Master of Business Administration degree was created at Harvard in 1908. Yet new research suggests that MBAs equip corporate leaders with one overriding skill: cutting workers’ pay.

A working paper circulated by the National Bureau of Economic Research looked at what happened at American and Danish companies after a CEO with a business degree took over from a CEO without one. In both countries, having an MBA at the helm led to a drop in worker pay. Within five years of a takeover by a business manager, worker wages fell by 6% in the U.S. and by 3% in Denmark, the researchers found. Those wages fell because more valuable employees tend to leave after someone with an MBA took over.

MBAs had limited success in other areas, according to the researchers — Daron Acemoglu, economist at the Massachusetts Institute of Technology; Alex He, assistant professor of finance at the University of Maryland; and Daniel le Maire, economist at the University of Copenhagen.

“[B]usiness managers are not more productive; firms appointing business managers are not on differential trends and do not enjoy higher sales, productivity investment, or employment growth following their accession,” they wrote.

Declining worker pay

Business is the most popular subject taught in U.S. universities, with a quarter of a million graduates in 2019. MBA degrees became more prevalent in management starting in the 1980s, with roughly a third of CEOs today holding a business degree — triple the share in the 1970s.

The spread of MBA degrees throughout upper management coincides with declining fortunes for the average worker, the researchers found. Between World War II and the late 1970s, U.S. workers’ pay rose in lockstep with how much they produced. Since 1980, however, workers’ output has increased at three and a half times the rate of pay, according to research from the Economic Policy Institute.

Adjusted for inflation, the typical worker in 2018 earned exactly the same wage as they did 40 years before, Pew Research Center has found.

While there are several reasons for the decline, at least some of the blame lies with MBAs, Acemoglu and his coauthors note. The popularity of “business managers can explain about 20% of the decline in the labor share [of income]. They also account for approximately 15% of the slowdown of wage growth since 1980,” they write.

The paper specifically points to a theory espoused by economist and free-market evangelist Milton Friedman, who famously posited that corporations have no responsibility to their employees or to society at large — only to their shareholders.

“[T]here is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits,” Friedman wrote in a 1970 essay.

The influence of Friedman’s ideas on business school training and on management consultants meant that some “managers started viewing workers not as stakeholders in the corporation but rather as sources of costs to be reduced,” according to the paper. 

Do MBAs produce better CEOs? “No.”

Around this time, corporate leaders also began to emphasize cost-cutting for its own sake, in which “identifying and removing ‘unnecessary’ costs started being viewed as an integral part of successful management,” the authors write. 

But if managers with MBA degrees aren’t good for workers, are they in fact good for corporations? Previous attempts to answer this question have concluded with a resounding “no.”

One paper published in 2015 found that managers with MBAs tend to behave in ways that benefit them, but not their company. They spend more on acquisitions than leaders without MBAs and achieve about $1 million a year more for themselves in pay increases, all while actually reducing the market value of their companies. 

A 2019 analysis by Institutional Investor magazine was unable to find any relationship between a CEO’s educational pedigree and their company’s stock performance. “MBA programs simply do not produce CEOs who are better at running companies,” the outlet concluded.

The new paper by Acemoglu throws further doubt on the value of an MBA education.

Betsey Stevenson, an economics professor at the University of Michigan and a member of the Council of Economic Advisers under President Obama, called the findings “damning of business schools, business education, [and] business ‘optimizing’ practices.”

“Managers with MBAs are best at taking money from workers and not much else,” she said in a tweet.


https://www.cbsnews.com/news/mba-degree-management-lower-worker-pay-study/

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