Blame Monopolies for Short-Changing U.S. Workers
There are several worrying trends in the global economy, such as rising inequality within countries and slowing productivity growth. But perhaps the most troubling of them is the fall in labor’s share of national income.
The division of the economy into labor and capital is one place where Karl Marx has left an enduring legacy on the economics profession. Labor income represents wages, salaries, tips and other forms of work-related compensation, while capital income encompasses dividends, capital gains, land rent and other income from investment. Although many rich people do earn labor income -- chief executive officer salaries, for example -- and poorer people do earn capital income from things like pensions, the division of income is a rough proxy for the balance of power between the classes.
For decades, that balance was a roughly even -- in the U.S., labor earned about two-thirds of all income, capital about one-third. That relationship looked so stable that many economists wrote it down in their models as a law of nature. But at least since 2000 -- and possibly since the 1970s -- capital has been taking steadily more of the pie:
This shift is a concern because it raises the specter of an all-powerful ownership class lording it over a society of impoverished workers -- a sure recipe for mass misery and social unrest. We’re still very far away from that dystopian future, of course, but economists are trying to diagnose the reason for the trend before it gets worse.
Three main explanations had been put forth. Some economists attributed the change to globalization -- a glut of labor from China and other post-communist countries that made workers cheap and plentiful. Others claimed that capital was simply becoming cheaper, leading companies to substitute machines for human workers. And a few others attributed the change to a rise in land rents.
Now, a fourth explanation is emerging. Two new papers suggest that the rise might be due to an increase in market concentration. If industries are slowly inching toward monopoly, a few superstar companies in each sector could be squeezing profits out of the rest of the economy.
The first of these new papers is by a large, star-studded team from the U.S. and Europe -- David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen. Titled “Concentrating on the Fall of the Labor Share,” it is short, clear and relies on relatively simple theories and general observations.
The authors challenge two out of the three typical stories. If China and globalization were behind labor’s decline, they argue, the fall would be greater in sectors more exposed to import competition; however, it’s across the board. If it were caused by machines replacing humans, we’d see labor lose out within each company -- instead, what’s happening is that companies that spend more on capital are growing at the expense of companies that use more labor.
Neither of these rebuttals is totally watertight, and the authors don’t deal with the land-rent explanation put forward by Northwestern University’s Matt Rognlie. But the facts are all consistent with the monopoly theory, which Autor et al. lay out in simple math. If industries are shifting from many players toward a winner-take-most situation, where the big successful companies can charge higher prices, that would cause capital to take more of the pie and labor to take less. The authors show how market concentration -- defined as the fraction of sales going to the top four companies in an industry -- has generally increased:
Labor’s income share tends to fall by more as industry concentration increases. This fits the theory’s predictions.
Meanwhile, a second paper, by Simcha Barkai of the University of Chicago, takes a different approach but reaches a similar conclusion. Barkai goes beyond the standard dichotomy between labor and capital, adding a third piece -- profit. In this breakdown, the true capital share is the return generated by actual, measurable capital like land, buildings, vehicles and machines. Any income above and beyond that represents profit.
Barkai finds that under this narrower definition, capital’s true income share has actually declined over time -- due in large part to the fall in interest rates and decreasing levels of business investment. What’s grown enormously is profit. Companies are investing less but making a lot more. The author estimates that true profit -- which in a perfectly competitive economy would be zero -- has gone from just over 2 percent of the economy in the early 1980s to more than 15 percent today. Like Autor et al., he pins the blame on increasing monopoly power, noting the correlation between how concentrated an industry is and how little of the pie its workers take home.
We don’t yet have a definitive, final explanation for labor’s decline. In a complicated field like macroeconomics, it’s very hard to tease apart cause and effect. But this new story is compelling. Monopoly power is a problem that economists have been watching more closely in recent years, and this could turn out to be just one more social ill that arises in its wake.
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