American companies are disappearing.

Photographer: Spencer Platt/Getty Images

The Unanswered Question Behind Wage Inequality

Peter R. Orszag is a Bloomberg View columnist. He is a vice chairman of investment banking at Lazard. He was President Barack Obama’s director of the Office of Management and Budget from 2009 to 2010 and the director of the Congressional Budget Office from 2007 to 2008.
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Why are some publicly traded companies continuing to improve their capital returns while others are disappearing? The answer may help explain -- and ultimately help policy makers address -- increasing wage inequality in the U.S. 

In a recent paper, Jason Furman and I highlighted a significant increase in the variation of capital returns across publicly traded companies. In particular, looking at data from McKinsey & Company on invested capital excluding goodwill for public nonfinancial companies in the U.S., the 90th percentile has risen to an astonishing 100 percent, from about 25 percent 25 years ago. During that same period, the number of domestic companies listed on the New York Stock Exchange and NASDAQ fell by more than a quarter. (As of September 2015, the number was down to almost half of its peak in 1996.) 

So what has caused this drop? It hasn't been recent government regulations, as Craig Doidge of the University of Toronto and co-authors have shown, in large part because the decline started well before new rules were in effect. And it doesn't have to do with NASDAQ's 1996 changes in listing standards, in part because the declines occurred proportionately on the New York Stock Exchange, whose standards remained the same. 

But could the decline in publicly traded firms reflect the same phenomenon as the increased variation in capital returns for those companies that Furman and I highlighted? Gustavo Grullon of Rice University and co-authors present evidence that it might be. They show that "the decline in the number of industry incumbents is associated with remaining firms generating higher profits through higher profit margins." In particular, in industries where the number of publicly listed companies has shrunk the most, the ones left standing tend to have higher profit margins than companies in other industries. 

One concern that remains is that what's happening among publicly traded companies may not reflect the economy as a whole. A 2006 analysis by Steven Davis of the University of Chicago and co-authors, for example, suggested that increased volatility in employment growth among publicly traded companies was more than offset by reduced variation among private ones, so, on that score, the public companies' experience didn't tell the whole story. 

The argument about wage inequality, however, is more tightly connected to company-level capital returns than employment volatility is. The Grullon group notes that "the void left by the disappearing public firms has not been filled by other market participants, such as private firms."

So we're left with a question that can be answered only by researchers with access to government data on company-level profits: Has the dispersion of capital returns and the emergence of superstars increased among all kinds of companies, or just publicly traded ones? In its final year, the Obama administration could advance our understanding of inequality by helping researchers find out.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Peter R. Orszag at porszag3@bloomberg.net

To contact the editor responsible for this story:
Mary Duenwald at mduenwald@bloomberg.net