Why Fewer Are Trying to Climb the Corporate Ladder

Someone once told me that my career fitted the dictionary definition of the word – a headlong rush, usually downhill. For most people, however, the term career implies the opposite. It’s a gradual climb upwards, often within a corporation, the climb being such that the cliché is to call it a corporate ladder. Some people stall, others fall off, and yet others jump to another ladder. But the core aim has always been the same: to get near the top. 

Yet something seems to be changing. As Business Insider reported recently, there is evidence that a growing number of workers don’t want to keep climbing. One survey found that 42 percent of American workers don’t want a promotion and are happy where they are. The figure was higher in other countries. Workers from Gen Z are even less likely to seek advancement. 

Business Insider doesn’t really come to a conclusion as to why this is, except to suggest that people today want rewarding work and suggest that higher pay does not offset the demands of greater responsibility. What this ignores, however, is that something more fundamental seems to be happening. Just as there is a realignment in our politics going on, there appears to be a realignment of work that goes to the heart of the nature of the firm. 

We have firms, as Ronald Coase realized, because of the existence of transaction costs. Transaction costs are those costs we face when attempting an economic transaction, not all of which are monetary. There are search and information costs in finding a vendor with a good track record. There are bargaining and contracting costs that come with negotiating a price, especially for an ongoing service. There are monitoring and enforcement costs, perhaps including litigation if the service or good is not up to standard. And so on.  

These costs are reduced by aggregating them all within a firm through employment. If I have someone employed to do, say, technical drafting, then search costs are reduced to zero, and bargaining costs are reduced to one annual pay review. Monitoring is much easier, and enforcement becomes easy when you can just fire an underperforming employee. The cost savings are so significant that corporate employment became the dominant way of work. 

Yet it is important to remember that the corporate way of work is not the natural way of work. That is, instead, what Adam Smith called the “system of natural liberty” – “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.” 

Corporate employment disrupts this system of natural liberty. In employment law, it is always important to remember, an employee is in a master/servant relationship with his or her employer. The employee’s time is not their own, so much so that they are always presumed to be acting on their master’s instructions (hence the principle of vicarious liability, among other things).  

So, there is an obvious tension between natural liberty and employment, one that resolved in favor of the employment contract in recent centuries thanks to the wealth-maximizing features of the firm. Careerism, it might be argued, was a way to gain the benefits of natural liberty within the constraints of corporate employment. Being a boss meant that you had fewer masters. 

Yet in recent decades things have shifted. Technology and specialization have reduced the transaction cost advantage of the vertically integrated corporation, while employment and labor law have increased the direct costs of employment. Indeed, as the law has increasingly shielded the employee, the result has been the rise of what the Australian commentator Ken Phillips calls the “independent employee,” someone who seeks the benefits of the system of natural liberty within the world of employment. 

Such workers do not view themselves as servants of masters. Rather, as Phillips puts it: 

They want to do and think for themselves. They are decisionmakers. They are self-managers. They seek to control their own destinies and careers and not to have the firm decide either their current or future place in the world. And the more educated they are, the more they want to exercise self-control. These people, working in firms, are the greatest challenge so far to the idea, structure and operations of firms. 

Until recently, this had manifested most visibly in the rise of the platform economy, where people consciously rejected the employment contract in favor of becoming their own boss, setting their own hours, and enjoying the flexibility such working arrangements provide. The platform economy could be seen as an alternative to the “boss economy.” 

Indeed, the platform economy became possible through technological changes that reduced transaction costs. For instance, Uber and other ridesharing apps significantly reduced the transaction costs of hailing a ride, meaning that people no longer had to rely on taxi firms and people who found driving people rewarding did not have to work for those firms. 

Yet it is what is happening with firms that may result in a bigger shake up in the world of work than the rise of independent contracting. The sudden advent of AI, even in its current form of large language models, is likely to significantly reduce internal transaction costs in a wide range of areas. Human resource management is a good example. Rather than turning to internal experts in employment law, or training, or retirement planning, employees are likely to engage with more accurate and more personalized advice in the form of chatbots. 

Middle management jobs are therefore suddenly extremely vulnerable. There have of course been jokes for many years about how little such positions add – jokes that were often unfair, it has to be said. Yet now it looks like the value added by such positions might be more affordably provided by artificial intelligence.  

This suggests that the future of the firm is one with two roles – specialists and strategic managers. The specialists will be able to be more generously rewarded while strategic managers provide the leadership that keeps the company ahead of its competitors. And yet more company functions will be provided by outside workers who are their own bosses or in smaller firms as transaction costs lower for their functions. 

My suspicion is that the rising disinterest in careerism is a result of these trends merging. Independent employees don’t want to be bossed or to boss others either. Transaction cost economics make that judgment sounder. If companies want to retain these workers as specialists their non-career benefits, like remote work or health- or family-related benefits, are probably going to be better retention tools than more pay and more responsibility. This is especially important as the challenges of the future may well require even bigger corporations than we have today, that will need to scale up or down more quickly than ever. 

The biggest problem here will of course be employment law and regulation. Unfortunately for the current realignment of work, most employment law and regulation was set in stone during the heyday of the American firm. The corporation was seen not just as a beneficial provider of work, but as a delivery mechanism for all sorts of social benefits, and as a potential exploiter of employees. So many of America’s social policies revolve around the employment contract. The rise of independent contractors and independent employees threatens this model.  

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