John Van Reenen & Christina Patterson
In most countries, labor’s share of the national income has declined for about three decades. Why?
Maybe the cause is “Robocalypse Now”—firms replacing expensive people with cheaper machines.
Or maybe Chinese imports have caused employers to outsource employment. However, China itself is experiencing a labor share decline.
We suggest another factor: the rise of superstar firms. Over the last 40 years, more industries have become “winner take most”. Firms with a cost or quality advantage have always enjoyed higher market shares. But the new behemoths of our age capture a much larger fraction—if not all—of their markets. Think Amazon.com, Apple and Google, or Goldman Sachs and Wal-Mart. These superstar firms make lots of profit per employee, so as they become a bigger part of the economy, labor’s share of gross domestic product declines.
The superstars’ rise isn’t simply a reflection of a rigged economy where the incumbents collude to rip off consumers and workers. The patterns we document are happening all over the world—which suggests that antitrust law or other policy-specific factors can’t be the primary driver.
If policy isn’t driving concentration, what is? One possibility is that the near-frictionless commerce powered by the Internet and globalization enables more efficient firms to be rewarded with higher market shares today than in the past. Does this mean we should be relaxed about the move to an economy dominated by superstar firms?
No, for at least two reasons.
The declining labor share has been coupled with a slowdown in economic growth. In effect, workers are getting a shrinking slice of a barely expanding pie.
And large firms are lobbying to protect their advantage, skewing the political system. Microsoft became a near-monopolist in operating systems, and then strove to keep entrants like Netscape out of the market. Even when superstars fail to deter competitors, they can often just buy up the new threat, as Facebook has with Instagram and WhatsApp.
John Van Reenen is a professor in the Massachusetts Institute of Technology’s department of economics and at the MIT Sloan School of Management. Christina Patterson is a doctoral candidate in economics at MIT.