Missing Middle Managers
The most advanced economies, most efficient firms, and most productive companies rely on modern technology. From stock markets to storefronts, the US and other developed economies have a large number of firms that use modern microprocessors, innovative software, and cutting-edge algorithms to do more for customers and clients. These tools have driven changes in productivity and growth in economies for decades, so much so that an observer of the economy may forget that technology applies to more than just the server rooms and the large data sets that define many contemporary developed economies. Technology also refers to how companies communicate with, monitor, and develop the staff who facilitate day-to-day operations. Technology is middle management as much as it is software, hardware, and advanced machinery.
Middle management may have a maligned reputation in the eyes of some readers. Old comic strips like Dilbert, movies like Office Space, and TV shows like The Office all aim their satire at the least flattering aspects of how companies attempt to inspire a productive workforce. However, economists like Heller-Hurwicz's Hannes Malmberg know better than to underestimate the centrality of management to the health and development of any economy. In his paper "The Missing Middle Managers: Labor Costs, Firm Structure, and Development," Hannes explores how developing economies struggle to grow because of peculiarities in the development of the market for professional salaried managers.
Hannes Malmberg's work builds on a body of research that establishes a clear connection between increases in productivity and the use of professional managers to create business strategies and monitor production. Many firms inside of developing economies forgo a professional middle management model and instead have single establishment owner-managed firms where self-employment and owner management are common. This type of enterprise has been shown to grow slower than enterprises that put professional management to use.
Why don't developing countries alter their practices? If professional management has established and clear benefits, one would think that economic forces would push firms to adopt better strategies. However, even though wages in general are much higher in rich countries, the real wages of high quality managers are quite similar when comparing developed and developing economies. This means that the cost of a middle manager in a developing country, whose firms have fewer resources, is similar to the cost of a middle manager in an advanced country, where firms have more resources to recruit and retain talent. This finding demonstrates why developing countries face difficulties introducing a class of middle managers to their economies; the relative cost of managers in developing countries is high compared to developed countries. Hiring qualified, effective managers can be cost-prohibitive.
Hannes Malmberg's research points toward a number of possible root causes for the difference in the cost of middle managers between developed and developing economies. First of all, the market for qualified managers is global. A well-educated manager can seek higher wages through immigration, so, if firms in developing countries want to retain managers, then they have to compete with the wages offered by firms in developed nations, which may be willing and able to pay higher wages. Additionally, the supply of managers may be thin because developing economies may not have the requisite education infrastructure to facilitate the development of middle managers. Middle managers need a complex skillset to communicate goals, develop business strategies, analyze data, and make optimal decisions. This makes it difficult to substitute less-skilled workers into management positions, and, if an education system cannot produce a sufficiently large pool of candidates for management jobs, the supply of these workers will be low, which may elevate costs. More details about the market for middle managers can be found on Hannes Malmberg's webpage.
Overall, Hannes Malmberg's work suggests that middle management human capital can play a central role for developing economies and that policy makers should consider the market for middle managers when charting policies for future growth.
