Over most of the 20th century, researchers consistently found that as the economy grew, workers got about the same share of what was produced. That no longer seems to be the case.
Beginning in the 1980s, workers across the world began to receive an increasingly smaller share of the gross domestic product pie (pdf). In 1975, income for workers represented about 64% of private production; that share dropped to 59% in 2012. This decrease in the “labor share,” as economists call it, of private production has compounded inequality and left economists flummoxed. What had once been a comforting fact about economic growth has become a conundrum.
New research from economists (pdf) at the Massachusetts Institute of Technology (MIT), Harvard University and the University of Zurich explains this trend by highlighting the role of increasing industry concentration. The researchers argue that a variety of factors have led to a “winner-take-most” economy, where a small number of efficient, technologically savvy companies gain increasingly large shares of their industry’s sales. This efficiency means that huge companies, like Walmart and Amazon, don’t need to spend as much on workers to maintain large amounts of revenue and profit.
The researchers found that in the US, just as the labor share declined in the 1980s, industry concentration rose. In every sector of the US economy, the four largest companies in the average industry had a significantly larger share of sales in 2012 than they did in 1982. (The US Economic Census collects data for many industries within a sector. For example, one of the industries within “Manufacturing” sector is “Household Furniture”).
Correlation doesn’t equate to causation, of course, and this observation could have occurred by chance. The researchers show that the two trends are related by demonstrating that the industries in which concentration grew the most also saw the greatest decrease in the labor share.
In terms of its effects on inequality, this phenomenon is unequivocally bad. “If labor gets a smaller share of national income, then a larger share goes to capital and profits,” the MIT economist David Autor, one of the paper’s authors, wrote to Quartz. “Capital ownership and profit shares are distributed much more unevenly than labor… so this trend is likely to exacerbate inequality.”
In terms of overall economic growth and productivity, it may be a positive. The researchers found that in US manufacturing, the industries with the highest growth in concentration are also the industries where output per worker has been improving the most. This suggest that the big companies winning a larger share of industries are doing so not because of anti-competitive practices, but because they are more efficient. “The advantages that Apple, Amazon, and Wal-Mart have stem from their technological leadership, not simply their size,” explains Autor.
This research is more evidence that improving technology is a driver of both growth and inequality. Dealing with this fact will be one of the great policy challenges of the 21st century.