This paper – which can be found here – focuses on the “fall of labor’s share of GDP in the United States and many other countries in recent decades”.
Why does this matter for competition law and policy? Because this phenomenon seems to be associated with the rise of “super-star” firms and increased market concentration – something that we kind of take for granted in the digital sector, but not necessarily elsewhere.
The paper starts by noticing that, while there is a consensus that the labour share has been declining over the past few decades, there is a lively debate on what are the causes of this recent decline. The two main likely culprits are: (i) the fall in the cost of capital relative to labour; (ii) trade and international outsourcing – i.e. labour shares have declined the most in industries that were strongly affected by increasing imports (e.g., from China). However, the authors argue that none of these explanations is fully successful.
Instead, the paper analyses micro panel data from the U.S. Economic Census since 1982 and other international sources. This data seem to indicate that the fall in the labour share may be based on the rise of “superstar firms.” They develop a theory based on the idea that industries are increasingly characterized by a “winner take most” feature – where a small number of firms gain a very large share of the market. 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 labour.
The authors then provide evidence for various testable predictions of this theory: (i) there has been a rise in sales concentration within four-digit industries across the vast bulk of the U.S. private sector; (ii) industries with larger increases in product market concentration have experienced larger declines in the labour share; (iii) the fall in the labour share is largely due to the reallocation of sales between firms rather than a general fall in the labour share within incumbent firms; (iv) the reallocation-driven fall in the labour share is most pronounced in precisely the industries which had the largest increase in sales concentration; and (v) these patterns are also present in firm- and industry-level datasets from other OECD countries.
For purely antitrust purposes, interesting findings include:
- According to all measures, industries have become more concentrated on average across the world. Further, the trend is much stronger when measuring concentration in sales rather than employment. This suggests that firms may attain large market shares with relatively few workers.
- The decline in the labour share has occurred in broadly similar industries across countries.
- Superstar firms produce more efficiently and therefore are larger while having lower labour shares.
- Industry sales increasingly concentrate in a small number of firms.
- The between-firm reallocation component of the fall in the labour share is greatest in the sectors with the largest increases in market concentration. Further, increases in concentration are associated with decreases in labour share among the largest firms.
In short, the international evidence is broadly consistent with the hypothesis that a rise in superstar firms has played a major role in the decline in labour’s share throughout the OECD. Markets seem to have changed in such a way that firms with superior quality, lower costs, or greater innovation now reap disproportionate rewards relative to prior eras. The superstar firm model is most immediately applicable to high-tech industries. For example, the rise in industry concentration is positively and significantly correlated with the growth of patenting intensity. Sectors where labour productivity (output per worker) rose faster are becoming more concentrated. This, together with other correlations identified by the authors, suggest that the industries becoming more concentrated are those with faster technological progress.
However, the creation of superstar firms does not seem to be related to a prior weakening of competition, since the impacts are not found cross-industry. An alternative explanation 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. Instead, one sees a re-allocation of market share to the most productive firms (i.e. which are also where the labour requirements have diminished the most) and more labour-intensive firms exiting the market. Yet another, “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. Nothing in our analysis rules out this mechanism, and we regard it as an important area for subsequent research.”
I am absolutely unqualified to assess the correctness of the analysis. But if this is even broadly correct (or perceived to be correct by the public), one can easily understand why: (i) antitrust would seem to be one of the obvious tools to address market concentration (ii) if other political mechanisms are blocked (e.g. by capture and lobbying), attempts will be made to politicise and instrumentalise antitrust to political ends. Given where this paper comes from – it could hardly have been written by more established orthodox economists, working for the US Government no less – I would say this trend is likely to intensify.