Innovation and upward mobility across the socioeconomic pyramid: A reason for optimism or pessimism?

This past week, I woke-up on November 9th to learn the election results of the nasty 2016 US presidential election. The results prompted me to finish this post that was already in the making for some time. While for many this election was about issues like race, gender or even immigration or other factors, I believe this election was ultimately decided by voters who felt massive economic insecurity. Last Tuesday (November 8, 2016), the election provided a channel for Americans, particularly those living throughout the so-called Rust Belt, to voice their collective economic resentment as they are increasingly left behind in an era of globalization and accelerated technology changes. In today’s post-election post, I will make an attempt to discern the impact of the accelerated pace of technological innovations on upward or downward socioeconomic mobility.

Last September, I published Innovation: Impetus for Global Resentment?, in which I argued that for most of the last century, the professional re-invention process happened naturally as a part of generational improvement as parents sought better futures for their children. At that time, the variables of the time constant of innovation and lifetime expectancy were somewhat aligned, enabling a rather natural process for successive generations to capture the opportunities presented by new technologies.  Each new generation could potentially aspire to a better lifestyle, afforded by higher paying jobs with higher value added, by embracing businesses enabled by technologies unavailable to prior generations. For the most part, education was the great enabler[1].

Today, and over the next decade, global innovations facilitated by exponential technologies, will be deconstructing and reconstructing every industry and business, as we have known them.  Each industry will have its own “Kodak moment” as digitalization, demonetization, dematerialization, democratization or for short massive disruptions target established incumbent businesses. As they continue to operate under old paradigms supported by old technologies, they fall prey to new business models and technologies embraced by agile new firms. This deconstruction and reconstruction of industries and their associated businesses will challenge the disrupted workforce to either: (a) resign to accept lower paying jobs at the base of the job pyramid, or (b) re-invent by gaining new skills in new areas with the hope of maintaining or improving the income level they enjoyed before the disruption happened.

In this post, we explore how this deconstruction and reconstruction process will become a threat to those jobs in the mid-income range, polarizing society and increasing income inequality between the commodity jobs at the base vs. the high value added jobs at the top (see below, Figure 1, Job Compensation Pyramid). Each one of these transformations will impact firms (and their employees) on the winning and on the losing side of the battle lines. However, all these transformations will have in common, and as ultimate winner the consumer, as each disruption will bring what economists call “consumer surplus”, benefiting them by increased convenience and productivity, adding predictability to their lives at a lower cost. The consumer adoption of these new technologies will become irreversible, and once embraced, it will spread virally and get installed in our lives until the next new technological disruption. Obvious examples include digital photography and e-mail, since it is highly unlikely we would ever return to celluloid photography or post office (or fax) delivered letters.

The disruptors “uberize”[2] existing industries in few years, creating new customer value by introducing new products and services at lower cost (or no cost) and offering higher productivity and convenience. In fact, it is this new customer value that fuel the viralization and massive adoption by end-consumers or business customers, catapulting the disruptors as dreadful competitors of established companies now under threat.  Whether is the taxi coop, a hotel chain or a photo parlor, they are all assaulted by the new entrants. Likely, these disruptors have limited or no prior experience in the industries targeted, however, they master the digitalization of businesses, new technological paradigms, and business model innovations; while enjoying access to capital from well-connected VC, Super Angels and other strategic investors.

The investors’ motivation is dominated by FOMO (Fear Of Missing Out). They participate in a XXI century version of wealth transfer from the incumbents to the few global disruptors they fund. They place their bets by funding what they hope will become the future Amazon’s, Google’s or Facebook’s. The odds are tiny but the multiples enticing. Hence, money flows in the form of investments to these entrepreneurial teams seeking to build the next Uber by targeting the incumbents in the established industry to be disrupted.

The disruptors are typically bright and energetic entrepreneurs often in their 20s and 30s with some or limited experience, unencumbered by the responsibilities of family or children. In many ways they have little to lose, not because they are irresponsible playing with others people’s money, but rather share the view that the challenge of becoming a disruptor is a worthy endeavor. A few years of their lives committed to a high risk moonshot, can provide and extraordinary learning experience, which if successful could make enough money for a lifetime. The hall of fame proves it is feasible, with new names being added periodically to those like Steve (Jobs), Larry (Page), Michael (Dell), Bill (Gates), etc.

The incumbent companies are at large passive bystanders. Actually, most of the firms knew of possible threats beforehand, however, their response were lukewarm as they were tangled in their own internal processes, and management energy’s misplaced in internal politics and preoccupied in their own personal future while serving often dying customers. The incumbent firm focus was highly optimized in the established (old) technology and serving traditional customers, leaving its flanks open to the disruptors targeting emerging technologies and/or new customers.

By the time the new reality defined by the disruptors emerges, is often too late and by then, their tepid actions are unable to reverse their fate, which by now is a painful decline and an irreversible death. In other words the firm faces its own “Kodak moment”. While management bears most responsibility, employees and supply chain stakeholders will suffer the most, affecting potentially hundreds of thousands/millions of jobs. In the absence of a well-defined action plan, many will be consigned to jobs with lower earning capacities and risk being jobless all together.

For most individuals, their position in the socioeconomic pyramid is determined by their compensation. Figure 1 below identifies three areas of the socioeconomic pyramid as defined by the job compensation.

At the base of the pyramid are commodity jobs typically compensated in the US under $20/hr.[3] They tend to be workers performing highly standardized activities with little differentiation generally prescribed by simple rules or algorithms. They often require limited amounts of training and the individuals holding those jobs for the most part are easily replaceable. Examples of these jobs are janitorial service providers, painters, customer service representatives, fast food workers, etc.

At the top of the pyramid are the highly compensated jobs (>$100/hr.). These tend to be professions requiring skills difficult to standardize. They often require knowledge and experiences that the market values highly, and are likely in limited supply. Therefore, these positions are generously rewarded. Examples of these jobs are plastic surgeons, board members, physicists, mental health professionals, most engineering fields, etc.

The middle income jobs (between $20 and $100/hr.) are those most challenged. These are the positions susceptible to disruption by emerging technologies (i.e. digitalization, machine learning, 3D printing, AI and big data, etc.). These workers perform activities able to be targeted by blue and white collar robots, and are sufficiently paid to justify the ROI (return on investment) by applying these new technologies. In other words these are the jobs that large sections of society holds, often referred as middle class jobs. Examples of these jobs include traditional manufacturing jobs across many industries, first/second level supervisor and administrative roles, logistical operators, financial analysts, etc.

As new technologies disrupt many jobs, it is worth mentioning two important dynamics:

  1. New technologies, as they become established, create new jobs, requiring new skills along the three ranges of the job compensation pyramid,
  2. Technological innovations do not know of “sacred cows”. Once considered “high value jobs”, at some point their protection erodes as new technologies are able to perform their functions better and more cheaply. The health care and legal professions have long been considered untouchable, but these too will feel a downward pressure from their positions of privilege.

Furthermore, the average lifespan of each technology is shortening, often to less than a decade to complete its life cycle, instead of multiple decades, which was the life cycle of technologies for most of the prior century. Therefore, “Kodak moments” are becoming increasingly likely, with the unfortunate consequences of the destruction of shareholder value and employment.

For the affected workers holding mid-income jobs, three possible outcomes are expected:

  1. Accept lower paying jobs and suffer income decreases at lower levels in the job compensation pyramid,
  2. Work longer hours or take second/third jobs to protect income levels,
  3. Re-invent by gaining new skills in new areas often borne out of one of the aforementioned disrupting technologies.

Options (1) and (2) are self-explanatory and represent suboptimal solutions since they require accepting in perpetuity lower income levels, or working longer and longer hours to retain prior income levels. Option (3) brings some hope, yet requires the non-trivial decision of applying the time, effort and resources required to embrace the personal/professional re-invention process. However, the selection of the area of re-invention or what new skills to acquire cannot be left completely to individual choice; rather, this decision will require guidance emanating out of a concerted collaboration between government and the technology and educational sectors.

Until my next post amigos – Carlos B.

[1] My own life experience is a perfect example. My immigrant father had only a 3rd grade elementary school education and my mother only completed 6th grade, yet their two children went on to college and completed graduate studies overseas.

[2] UBER disrupted the taxi and limo industries around the world in just few years (<5 years)

[3] Fully loaded salaries, in other words, the gross salary plus the cost of the benefits paid by the employer.

About Carlos S. Baradello

Investor, thought leader, and advisor in areas of corporate innovation, born global entrepreneurship and global scaling.
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1 Response to Innovation and upward mobility across the socioeconomic pyramid: A reason for optimism or pessimism?

  1. domingostern says:

    Excellent analysis Carlos!!! It is one of the best I have read.
    I am sure many readers will agree and wish you a happy birthday!!!!!

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