The share of US national income going to workers been on a mysterious decline in recent decades, and new research suggests what’s behind the plunge.
Even after an uptick last year, labor’s share of income still hangs well below where it was in the 1990s, much less the heights of the 1970s. What it means, overall, is that American workers are receiving relatively less compensation than they did in decades past, contributing to worsening economic inequality.
Economists don’t have a clear consensus on why this is the case. One theory is that cuts to taxes on capital have allowed the wealthy to generate ever-larger incomes from investments, or that globalization and trade rules are allowing American capitalists to do business more cheaply overseas, keeping the profits for themselves. Another is that automation has made it easier for capital to replace labor. Or, it could just be that our subsidized real estate markets are themselves devouring labor share.
A better answer, according to five university economists who collaborated on a new paper, could be more fundamental to the way the economy works today:
“We hypothesize that industries are increasingly characterized by a ‘winner take most’ feature where one firm (or a small number of firms) can gain a very large share of the market.”
Examples cited are Google or Facebook, which indeed command huge shares in their respective businesses. But it’s not just the obvious tech companies that are concentrating power. In six sectors examined by the researchers (manufacturing, retail trade, wholesale trade, services, finance, and utilities and transportation), concentration increased significantly.
“Because these superstar firms are more profitable, they will have a smaller share of their labor in total sales or value added,” the authors write. “Consequently, the aggregate share of labor falls as the weight of superstar firms in the economy grows.”
Enabled by the internet
Many of these firms exploit the internet as a platform to deliver goods that have low marginal costs, while others benefit from increased network effects in global communications that allow strong brands to win market share. There also is a trade angle here: Global markets have allowed successful firms to reap the advantages of efficiency even more broadly.
But the findings, shared among finance executives and Washington policymakers, seem to contradict the traditional argument that the government needs to fight concentration in order to enhance productivity. Interestingly, the researchers looked at one sector, manufacturing, to see if the concentration could be traced to superstar firms simply being more efficient or pushing for anti-competitive barriers. They found evidence that the manufacturing superstars really were more productive, not rigging the game.
That likely fits in with the anti-trust policies of the incoming Trump administration. Tech investor Peter Thiel, an outside advisor to the White House, has praised monopolies as the only way for companies to truly innovate. But it’s not clear what Trump’s team will do about sinking wages for workers.
Several of the researchers who worked on this paper, including MIT’s David Autor, were also behind an influential study of the effects of Chinese trade on US workers. Quartz asked Autor to compare the two trends.
“There are some important distinctions,” he said. “The China shock was much more sudden than the gradual fall in the labor share in the 2000s. This makes it more immediately disruptive.”
Also, he noted, “the fall in the labor share is experienced by most major sectors, meaning that the effects are broadly distributed over many workers. …. [A]ll that said, a fall in the labor share of a few percentage points is a big deal for average worker earnings (assuming that most workers don’t own capital that offsets these losses).”