A year ago, she was a store manager at Toys “R” Us. Today, Anne Marie Reinhart Smith has become a minor online celebrity. Not to say that everyone knows her name, but she’s become the lede for many a story (and now this one, as well) written about the store’s recent bankruptcy and all of the employees they left high and dry (33,000, to be exact). Her history with the company–as well as the way it unceremoniously dropped her and thousands of others–hints at a larger narrative about how the intersection of business and labor have changed over the years.

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“I worked there for 29 years,” Smith tells me. She had been at the toy store through good times and bad, rising from human resources manager to store manager. When word came out about new store cuts late last year, she felt at least a little prepared. Smith had seen layoffs at Toys “R” Us before, and every time her colleagues were given at least a little bit of severance. But this time the company announced it was going bankrupt and no severance was being offered. Smith was shocked. “They had never not given severance packages,” she tells me. The shocks continued. A few months later, the store began its liquidation, which ultimately led to every store closing. Now it wasn’t just some layoffs, but the entire workforce. And with the exception of executives, who were given a sizable golden parachute, now-axed Toys “R” Us employees were given nothing–they were expected to simply stop working and apply for unemployment. Stories like this are not uncommon, and while they sometimes generate some outrage, private equity deals that strip companies of their assets and leave the workers with nothing are just one particularly egregious part of a larger trend: that the value created by companies is being shared with fewer and fewer people. While the stock market continues to grow, wages have stagnated. There are myriad causes, but they all point to one problem: investor greed. Private equity firms buy up companies they think they can quickly fix and extract returns from. Boards increase the pay of CEOs while saying they can’t afford to raise wages. And companies are offering shareholders billions in stock buybacks, instead of reinvesting returns into a company and its employees. How private equity discards workers for profit When I talked to Smith, she bluntly described the days that led to her losing her job. And she also talked about the system that she believes led to this situation. Private equity firms had bought the retail store in a highly leveraged buyout in 2005. The firms Bain Capital, KKR Group, and Vornado Realty Trust purchased all shares of the company for $6.6 billion. The firms put down only a small down payment of that sum, and had Toys “R” Us take on $5.3 billion of debt to finance itself being purchased. This is how the entire private equity system works. A firm, or group of firms, look out for struggling companies they believe they can quickly fix and make a return. They purchase them, forcing the businesses themselves to accrue insane debt loads to be “saved” by the private equity firms. And then the firms implement sweeping changes to make their money back–usually massive cuts and pay freezes. A common effect of a private equity buyout is liquidation; if the company can’t keep up with its interest payments or isn’t able to create a big enough profit, the firms will sell the organizations for parts. This is still often considered a success for shareholders because they made a return. This story is part of our series, Why Work Has Failed Us, looking at why employment no longer provides the economic security it used to. You can read more here.

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A number of companies were purchased through leveraged buyouts–PetSmart (which is still saddled with an enormous debt), Payless Shoes (which filed for bankruptcy in 2017), and Mervyn’s department store (which left over 30,000 people without a job after going bankrupt and closing its stores). And the firms doing these deals have long been considered predatory capitalists. In 2012, Barack Obama ran a series of ads tying Mitt Romney to Bain Capital, the private equity firm he ran for decades. The TV spots described a steel company in Kansas City that Bain bought and then put out of business. For Toys “R” Us, the private equity reality was especially stark, even before it filed for bankruptcy. When it was first bought out, the retail store was instantly riddled with financial difficulties given the high interest payments it had to pay due to the debt load. These payments, which grew thanks to more debt amassed over time, amounted to more than $400 million every year–more than the company’s yearly profit. And that’s what ultimately brought the store down, leaving Smith and tens of thousands of others without a job or safety net. That a private equity-induced debt load killed Toys “R” Us is only part of the story. The other part is how leveraged buyouts hurt workers all along. There’s a stark difference between how employees–the people who came in every day to sell the company’s products, allowing it to have any profits at all–were treated before and after a consortium of investors took over the company. The moment the store was bought out some 10 years ago, says Smith, everything changed. In an attempt to milk as much money out of the organization as possible, many positions were axed almost instantly. “They kept cutting off payroll and cutting off payroll, expecting one person to do the job of two people,” she says. This is a common private equity expectation–these investments aren’t to build scaling, thriving businesses, but to eke out as much profit for as little money as possible. Private equity investments are short-term mad dashes to make investors richer. Says Smith, not only were fewer people working at the stores, but employees instantly saw wages decrease. Toys “R” Us would normally give employees a yearly wage increase of anywhere between 25¢ to 75¢, depending on performance, Smith tells me. Once the buyout happened, these raises began to dry up. “There was one year that I got a 7¢ raise,” she says. The human resources person charged with telling Smith about her paltry raise was embarrassed to have her sign her new salary. Stagnating salaries versus skyrocketing stock markets This rise of leveraged buyouts coincides with wage stagnation. Though many politicians point to the current bull market, along with healthy unemployment statistics, the truth is that it’s never been tougher for the American worker to make ends meet.

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Numbers from the Pew Research Center show that the average wage Americans make has nearly the exact same purchasing power it did 40 years ago. And what makes matters even starker is that fact that wages are going up for some–the top earners: Meanwhile, wage gains have gone largely to the highest earners. Since 2000, usual weekly wages have risen 3% (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3% among the lowest quarter. But among people in the top tenth of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426). Essentially, the current moment American workers are in is one of stagnant wages while the rich get richer. In fact, numbers from the Bureau of Labor Statistics show that, when taking inflation into account, the wages of of “production and nonsupervisory” workers have actually fallen this year compared to the year before. This is not because companies are tightening their belts. Corporate profits as a share of the national income are near the highest they’ve been since 1970. According to numbers tallied from the AFL-CIO, the average total compensation that a CEO at an S&P Index 500 company brings in is $13.94 million. Meanwhile, the average non-supervisory worker only makes an average of $38,613. There are, of course, a number of factors contributing to this: shareholder dominance, the slow demise of unions, and more. And examples like Toys “R” Us indicate the impact private equity deals can have on large workforces. Here, we have another story of thousands of layoffs after years of cutting costs. Smith’s story alone shows how worker wages can fall while executive and shareholder profits can increase. Instead, businesses could begin to explore alternatives to both remain afloat and create more stability for their employees. Senator Elizabeth Warren (D-MA) recently proposed a plan that would mandate more workers on corporate boards in large companies to serve as a bulwark against deals that don’t take regular employee’s lives into account. Another might be encouraging more worker cooperatives. This model means that the owner sells the company to its employees who become worker-owners, each with a vote in decisions over how the company is managed, and an equal share in the profits. While there are currently only about 300 in the U.S., they stand in stark contrast to the predatory nature of private equity buyouts as a way of ceding more power and agency to workers. According to a recent study from the Democracy at Work Institute, which supports the development of worker co-ops, the model correlates with a 5% boost in productivity, reduced employee turnover, and higher wages and profits. Driving down wages Data has shown that private equity and leveraged buyouts have a negative impact on employee wages. A study from 2009–one of the only ones that looked at the intersection of labor and private equity–found that companies taken over by private equity saw decreased earnings-per-workers in the years after the firms had taken over. Meanwhile, productivity increased. This, wrote the study’s authors, illustrated that “private equity firms are increasing the gap between productivity and earnings per worker.” Beyond stifling wages of those currently employed, there’s also the fact these deals lead to more people losing jobs. As ailing businesses increasingly take on debt due to highly leveraged buyouts, the more common outcomes like Toys “R” Us’s bankruptcy become. Professors Rosemary Batt and Eileen Appelbaum, in one chapter of the book Inequality, Uncertainty, and Opportunity: The Varied and Growing Role of Finance in Labor Relations, described the impact of these bankruptcies:

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Workers employed in private equity buyouts are more likely to lose their jobs—accentuating wage inequality because when unemployed workers find new jobs, they typically earn lower wages and benefits and have lower-wage earnings profiles over their lifetimes. Indeed, Smith says that though she has finally gotten a new job after many months of unemployment, she’s making less than what she was before. “It’s nothing catastrophic,” she assures me. “I’m hoping I get back up there soon.” According to Batt, a professor at the School of Industrial and Labor Relations at Cornell University and co-author of the book Private Equity at Work: When Wall Street Manages Main Street, Smith’s lower earnings are an example of the impact this ownership structure has on workers’ wages. “People do not recover their age earnings profile over their lifetime,” she tells me, when they lose their job due to a bankruptcy. “It puts them on a lower trajectory.” Which is to say, private equity has both a direct and indirect impact on workers wages–whether it’s the way it stifles growth, or how bankruptcies halt impacted workers’ earnings, both present and future. Jim Baker of the watchdog organization Private Equity Stakeholder Project explains that this effect is not that surprising. The sorts of retailers that go through bankruptcy and liquidation, he says, “are predominantly the private equity-owned ones.” It’s a direct result of organizations that “haven’t had the resources to be able to invest in change [due to the] massive debt burden.” Ripping holes in the safety net For the most part, there’s very little employees can do. The volume of private equity buyouts has skyrocketed over the last few years. In June, leveraged buyouts hits $158 billion for this year alone–the most the world has seen since 2007. And as more companies saddle themselves with untenable debt loads, we will certainly see more more bankruptcies and liquidation. Meanwhile, executive greed continues apace. Following the most recent Republican-led tax cut, U.S. public companies gave shareholders $436.6 billion worth of stock buybacks. Which is to say that the legislation meant to save businesses money, which would theoretically be used to help them grow and better provide for employees, actually led to Wall Street paying itself a huge bonus. Despite big headlines like Toys “R” Us’s closing, the industry isn’t changing. “We don’t see any substantial change in the private equity business models,” says Batt, “we continue to see a string of bankruptcies such as Toys “R” Us.” As this persists, explains Batt, “People will continue to lose their jobs.”

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For Smith, her change in circumstances has led to this new activist role. She has been working with organizations like the Center for Popular Democracy–as well as other fired workers–to make their stories known. Smith has taken her message around the country, lobbied hard for changes, and even met with politicians like Bernie Sanders. And her work is now beginning to pay off. Both Bain and KKR are beginning a dialog with displaced workers about potentially creating a “family fund,” which would essentially give severance to those impacted by the Toys “R” Us liquidation. As Smith puts it, “There’s nothing to protect workers in these situations.” And so this development would be one way for employees impacted by leveraged buyouts to have some sort of a safety net. Despite inroads from both KKR and Bain, Vornado has yet to respond to these calls. Smith and other activist groups are continuing to hound the firm to make it accountable for the destruction it caused. Baker is hopeful that this potential agreement could lead to better practices down the line. “Anything that the firms ultimately do does send a message to others in the sector,” he says. “If you’re responsible for creating the conditions that created a collapse, then take responsibility for cleaning up the mess.” And perhaps this ordeal will lead to great public understanding about how this predatory system works. For Batt, one of the most pressing issues going forward is demystifying the opaque world of private equity. “The transparency of private equity funds is murky,” she tells me. Not only that, but with the deal volume increasing, the firms’ power only increases. “Their influence is really powerful,” she says, “but it’s hidden.” Smith has personally experienced this power, and she wants things to change. Ultimately, she hopes to convince legislators to enact laws that would crack down on highly leveraged buyouts. Right now, her focus is simply on getting her former colleagues some back pay. Whatever the outcome, Smith’s eyes are now open, and she’s going to continue to fight for workers’ rights. “I’m not giving up,” she says, “and it’s definitely not over for us.”