Wednesday, June 14, 2017

Business concentration and labour share of incomes

Tim Harford points to the work of David Autor, David Dorn, Lawrence Katz, Christina Patterson, and John Van Reenen which finds evidence that the declining share of labour in national output has been caused by business concentration across sectors. They analyse micro-panel data on 676 industries from the US Economic census since 1982 and international sources and find the causal chain running into the rise of "superstar firms",
If globalization or technological changes advantage the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms with high profits and a low share of labor in firm value-added and sales. As the importance of superstar firms increases, the aggregate labor share will tend to fall. Our hypothesis offers several testable predictions: industry sales will increasingly concentrate in a small number of firms; industries where concentration rises most will have the largest declines in the labor share; the fall in the labor share will be driven largely by between-firm reallocation rather than (primarily) a fall in the unweighted mean labor share within firms; the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; and finally, such patterns will be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.
They found that while in the early 1980s, the largest four players in any given US manufacturing industry averaged 38% of sales, it had risen to 43% three decades later. In utilities and transportation, the share rose from 29% to 37%, while in retail, it rose form 14% to 30%. In the same time workers share of the economic value added declined from 66% to 60%.

About the reasons for such business concentration, they posit a few possible contributors,
One source for the change in the environment could be technological: high tech sectors and parts of retail and transportation as well have an increasingly “winner takes all” aspect. But an alternative story is that leading firms are now able to lobby better and create barriers to entry, making it more difficult for smaller firms to grow or for new firms to enter. In its pure form, this “rigged economy” view seems unlikely as a complete explanation. The industries where concentration has grown are those that have been increasing their innovation most rapidly as indicated by patents. One might be concerned that these patents are designed to thwart innovation and enshrine monopolies... A more subtle story, however, is that firms initially gain high market shares by legitimately competing on the merits of their innovations or superior efficiency. Once they have gained a commanding position, however, they use their market power to erect various barriers to entry to protect their position...

The rise of superstar firms and decline in the labor share also appears to be related to changes in the boundaries of large dominant employers with such firms increasingly using domestic outsourcing to contracting firms, temporary help agencies, and independent contractors and freelancers for a wider range of activities previously done in-house, including janitorial work, food services, logistics, and clerical work. This fissuring of the workplace can directly reduce the labor share by saving on the wage premia (firm effects) typically paid by large high-wage employers to ordinary workers and by reducing the bargaining power of both in-house and outsourced workers in occupations subject to outsourcing threats and increased labor market competition. 
Business concentration has other implications. An OECD study found that the "productivity gap between the most productive firms and the rest is growing". It also squares up with the work of Jason Furman and Peter Orzag who find that the widening inequality in the US is "driven more by a widening gap in the average earnings of workers in different companies than by a widening gap between pay checks inside individual businesses", and that too driven by top-tier firms in healthcare, finance, and information technology.

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