Technological Dynamism and the Fall in Labor's Share

The rise of "superstar firms" that are adept at patenting and using new technologies may be key to understanding the changing income shares of capital and labor.

Labor's share of economic output, the ratio of wages and compensation to national income, has declined in the last three decades in most developed nations, but the explanation of this trend is not yet clear. A new study of U.S. industries finds that the rise of "superstar firms" that dominate their sectors is a key factor.

On average, the greater the share of an industry's sales that are concentrated among a small group of leading firms, the larger the decline in labor's share of that industry's output, the researchers of The Fall of the Labor Share and the Rise of Superstar Firms (NBER Working Paper No. 23396) report. They find that superstar firms enjoy wide profit margins in part because of their ability to capitalize on rapid technological change. The decline in labor's share "is largely due to the reallocation of sales between firms rather than a general fall in the labor share within incumbent firms," David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen write. It is not that all firms have enjoyed a general fall in the shares of their sales going to labor costs — it is more that the superstar firms with low labor shares are capturing an ever greater share of the market, pushing down the aggregate labor share. The researchers show that "these patterns are also present in firm- and industry-level datasets from other OECD countries."

In contrast to previous studies that have looked to macroeconomic and industry-level data to explain labor's diminishing share, these researchers assemble firm- and establishment-level census data for six major sectors of the U.S. economy from 1982 through 2012 covering four-fifths of private sector employment. Labor's share of U.S. output fell from about 67 percent to 61 percent during that period. Looking at supplemental data for several OECD nations in Europe over part of that period, they find that such declines are common and are even larger in France, Germany, and Sweden.

The researchers find a consistent pattern in all six sectors. The market share of superstar firms is rising, causing an increase in concentration in detailed industries within these sectors. The industries where concentration rose most during the study period were the same ones in which the labor share declined most. This decline was due to the reallocation of output to superstar firms, rather than a general fall in labor share across all firms.

Over their three decades of data, the researchers find that the effects of concentration on labor share are accelerating. For example, they report that during the second half of their study period, rising concentration in manufacturing was responsible for a third of the fall of labor's share.

A complementary analysis of firm data from many other developed nations reveals patterns that closely resemble the changes observed in the United States. Almost all countries experience a decline in labor's share of income that is primarily due to the expansion of large firms with low labor shares, rather than a broad-based fall in labor income across all firms.

The researchers suggest that these patterns are not simply due to greater lobbying by dominant firms driving up barriers to entry and expansion. "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," they conclude. However, they caution, even if the growth of superstars arises from competition on the merits, dominant firms may exploit their market power to protect their positions.

— Laurent Belsie