The Fall of the Labor Share and the Rise of Superstar Firms | Autor, Dorn, Katz, Patterson, Van Reenen

David Autor (MIT) David Dorn (Zurich) Lawrence F. Katz (Harvard), Christina Patterson (MIT), John Van Reenen (MIT); The Fall of the Labor Share and the Rise of Superstar Firms; In Some Venue Surely, <sour>or maybe this is one of those half-decade duration “working papers” that the social scientists meditate upon before reporting out a “completed work” long after the effect has dematerialized <advice>give it a DOI number and be done with it, everyone else has already used or ignored the implications for policymakers concepts in the remediatory nostrums</advice></sour>; 2017-05-01; 74 pages.

tl;dr →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.</quote>

Claimed

Proven (shown with the evidence available at the time).

Hypotheses
  1. industry sales will increasingly concentrate in a small number of firms.
  2. industries where [industry sales] concentration rises most will have the largest declines in the [unweighted mean] labor share.
  3. the fall decline in the [unweighted mean] labor share will be driven largely by caused by between-firm reallocation
    the fall decline in the labor share will be independent of (primarily) a fall decline in the unweighted mean labor share within firms.
  4. the between-firm reallocation component of the fall decrease in the [unweighted mean] labor share will be greatest in the sectors with the greatest increases in market [industry sales] concentration.
  5. the effect is pervasive, always and everywhere <quote>such patterns will be observed not only in U.S. firms, but also internationally<quote>.

Abstract

The fall of labor’s share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain. Existing empirical assessments of trends in labor’s share typically have relied on industry or macro data, obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and international sources and document empirical patterns to assess a new interpretation of the fall in the labor share based on 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.

Conclusions

In this paper we have considered a new “superstar firm” explanation for the widely remarked fall in the labor share of GDP. We hypothesize that markets have changed such that firms with superior quality, lower costs, or greater innovation reap disproportionate rewards relative to prior eras. Since these superstar firms have higher profit levels, they also tend to have a lower share of labor in sales and value-added. As superstar firms gain market share across a wide range of sectors, the aggregate share of labor falls. Our model, combined with technological or institutional changes advantaging the most productive firms in many industries, yields predictions that are supported by Census micro-data across the bulk of the U.S. private sector. First, sales concentration levels rise across large swathes of industries. Second, those industries where concentration rises the most have the sharpest falls in the labor share. Third, the fall in the labor share has an important reallocation component between firms—the unweighted mean of labor share has not fallen much. Fourth, this between-firm reallocation of the labor share is greatest in the sectors that are concentrating the most. Fifth, these broad patterns are observed not only in U.S. data, but also internationally in European OECD countries. Notably, the growth of concentration is disproportionately apparent in industries experiencing faster technical change as measured by the growth of patent-intensity or total factor productivity, suggesting that technological dynamism, rather than simply anti-competitive forces, is an important driver of this trend.

The work in this paper is of course descriptive and suggestive rather than the final word in this area. Future work needs to understand more precisely the shocks that lead to the emergence of superstar firms. We have presented our model as one where productivity (or quality) differences between firms are magnified when the competitive environment changes, turning leading firms into dominating superstars. 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 (Figure 14). One might be concerned that these patents are designed to thwart innovation and enshrine monopolies (e.g., Boldrin and Levine, 2008). However, we also observe similar relationships when measuring innovation by citation-weighted patents or TFP growth.

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. Nothing in our analysis rules out this mechanism, and we regard it as an important area for subsequent research.

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 (Weil, 2014; Katz and Krueger 2016). 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 (Dube and Kaplan, 2010; Goldschmidt and Schmieder, 2017). The increased fissuring of the workplace has been associated with a rising correlation of firm wage effects and person effects (skills) that accounts for a significant portion of the increase in U.S. wage inequality since 1980 (Song et al., 2016). Linking the rise of superstar firms and the fall of the labor share with the trends in inequality between employees should also be an important avenue of future research.

Mentions

Data

Exemplars

The “superstar firms” are “winner take most”

  • AirBNB
  • Amazon
  • Apple
  • Facebook
  • Federal Express
  • Google
  • Uber
  • Walmart

Puzzles

  • But not for Sears (giggle)
  • But not for coal (mining)
  • But not for oil (end-to-end)
  • But not for autos (design, integration, assembly)
  • But not for airlines
  • But not for bulk steel
  • But not for shipbuilding
  • But not for furniture making
  • But not for semiconductors
  • But maybe for (mobile) CPU chips; e.g. Samsung of ARMdroid.
    But maybe for (desktop) CPU chips; e.g. Intel of Wintel.