A paper presented this past weekend at the annual meeting of the Allied Social Science Associations in Chicago offers a new take on an increasingly important economic policy question: What’s behind the decline in the U.S. share of income going to labor? The new research is by economists David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich, Lawrence Katz of Harvard University, and Christina Patterson and John Van Reenen of MIT.
The paper reveals an important fact about the labor share’s decline—if it were due to an overall change in the price of capital or labor then economists would expect to see workers’ share of income decline across all firms, but the five researchers find the average labor share of income for all firms has actually been constant since the early 1980s. This means that something must have changed with the distribution of income among the firms or within at least some of them to result in a decline in the aggregate labor share of income in the United States.
The economists look at firm-level data on the labor share of income to see what’s happening. Using firm-level data on sales and employee compensation, they find a strong correlation between increasing concentration of sales among firms and a lower share of income accruing to workers in the same industry. The five economists argue that competition within these industries is shifting income toward successful, less labor-intensive firms “superstar firms.”
Note that it’s not a lack of competition resulting in higher price markups that’s causing the decline in the labor share of income in these industries, as some other research has argued. Rather, this new paper emphasizes the role of competition in shifting sales toward firms with a lower share of income going to workers. The analysis of the data by the five authors shows that most of the decline is due to the shift in higher sales toward firms with low labor shares.
But as MIT economist Daron Acemoglu pointed out at the ASSA session where the research was discussed, the decomposition of the labor share’s decline that the authors used lump declines due to reallocation toward firms with declining labor shares in with declines due to reallocation to firms with low labor shares. In other words, concentration could be pushing income toward firms that already had low labor shares and/or pushing income toward firms with declining labor shares. This could mean that part of this reallocation is due to business concentrating among firms with rising markups. A determination of how much of a role this factor plays compared to just a movement toward superstar firms is something to look out for.