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The Fall of the Labor Share and the Rise of Superstar Firms

TL;DR: In this paper, the authors analyzed 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."
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.
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Journal ArticleDOI
TL;DR: In this article, the authors present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US employment over the recent past.
Abstract: We present a framework for understanding the effects of automation and other types of technological changes on labor demand, and use it to interpret changes in US employment over the recent past. At the center of our framework is the allocation of tasks to capital and labor—the task content of production. Automation, which enables capital to replace labor in tasks it was previously engaged in, shifts the task content of production against labor because of a displacement effect. As a result, automation always reduces the labor share in value added and may reduce labor demand even as it raises productivity. The effects of automation are counterbalanced by the creation of new tasks in which labor has a comparative advantage. The introduction of new tasks changes the task content of production in favor of labor because of a reinstatement effect, and always raises the labor share and labor demand. We show how the role of changes in the task content of production—due to automation and new tasks—can be inferred from industry-level data. Our empirical decomposition suggests that the slower growth of employment over the last three decades is accounted for by an acceleration in the displacement effect, especially in manufacturing, a weaker reinstatement effect, and slower growth of productivity than in previous decades.

537 citations

Journal ArticleDOI
TL;DR: In this article, the authors discuss an explanation for the fall in share of labour in GDP based on the rise of "superstar firms" and find that sales will increasingly concentrate in a small number of firms and that industries where concentration rises most will have the largest declines in the labour share.
Abstract: In this paper, we discuss an explanation for the fall in share of labour in GDP 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 profit margins and a low share of labor in firm value-added and sales. As the importance of superstar firms increases, the aggregate labour share will fall. This hypothesis suggeststhat sales will increasingly concentrate in a small number of firms and that industries where concentration rises most will have the largest declines in the labour share. We find support for these predictions aggregating up micro-data from the US Census 1982-2012.

430 citations

ReportDOI
TL;DR: The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's, and as discussed by the authors argue that declining competition is partly responsible for this phenomenon.
Abstract: The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. We argue that declining competition is partly responsible for this phenomenon. We use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, we show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing we show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, we provide some evidence that the increase in concentration can be explained by increasing regulations.

278 citations


Cites background or result from "The Fall of the Labor Share and the..."

  • ...In particular, Autor et al. (2017) consider NAICS Level 4 industries, over what appears to be a longer period of analysis (1982 to 2012).19 Nonetheless, like the results of Autor et al. (2017), our results suggest the presence of some correlation between concentration and productivity – especially…...

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  • ...…workers requiring Occupational Licensing in each NAICS Level 3 industry from the 2008 PDII as a proxy for barriers to entry.17 • Superstar firms: For superstar firms, we follow Autor et al. (2017) and explore the re- lationship between changes in concentration and changes in industry productivity....

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  • ...…be complemented by a rise in the likelihood of incumbent innovation, which may increase the gap between leaders and laggards (see, for example, Autor et al. (2017)) • Demographics: As discussed in Pugsley et al. (2015), the decrease in business dynamism may be driven by a decline in the…...

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  • ...This is discussed at length in CEA (2016); Autor et al. (2017) and Grullon et al. (2016), among others, so we only highlight the key facts....

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  • ...These results roughly match the qualitative discussion in Autor et al. (2017)....

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ReportDOI
TL;DR: In this paper, the authors estimate that close to 40% of multinational profits are shifted to low-tax countries each year by combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world's other countries.
Abstract: By combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world's other countries, we estimate that close to 40% of multinational profits are shifted to low-tax countries each year. Profit shifting is highest among U.S. multinationals; the tax revenue losses are largest for the European Union and developing countries. We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places - in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the sizeable costs involved for high-tax countries. We provide a new cross-country database of GDP, corporate profits, trade balances, and factor shares corrected for profit shifting, showing that the global rise of the corporate capital share is significantly under-estimated.

277 citations

ReportDOI
TL;DR: In this article, the authors examine the potential impact of artificial intelligence (A.I.) on economic growth and the division of income between labor and capital, and the linkages between A.I. and growth are mediated by firm-level considerations, including organization and market structure.
Abstract: This paper examines the potential impact of artificial intelligence (A.I.) on economic growth. We model A.I. as the latest form of automation, a broader process dating back more than 200 years. Electricity, internal combustion engines, and semiconductors facilitated automation in the last century, but A.I. now seems poised to automate many tasks once thought to be out of reach, from driving cars to making medical recommendations and beyond. How will this affect economic growth and the division of income between labor and capital? What about the potential emergence of “singularities” and “superintelligence,” concepts that animate many discussions in the machine intelligence community? How will the linkages between A.I. and growth be mediated by firm-level considerations, including organization and market structure? The goal throughout is to refine a set of critical questions about A.I. and economic growth and to contribute to shaping an agenda for the field. One theme that emerges is based on Baumol’s “cost disease” insight: growth may be constrained not by what we are good at but rather by what is essential and yet hard to improve.

217 citations

References
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Posted Content
TL;DR: In this article, the authors present three key facts about income and wealth inequality in the long run emerging from my book, Capital in the Twenty-First Century, and seek to sharpen and refocus the discussion about those trends.
Abstract: In this article, I present three key facts about income and wealth inequality in the long run emerging from my book, Capital in the Twenty-First Century, and seek to sharpen and refocus the discussion about those trends. In particular, I clarify the role played by r > g in my analysis of wealth inequality. I also discuss some of the implications for optimal taxation, and the relation between capital-income ratios and capital shares.

7,011 citations

Journal ArticleDOI
TL;DR: This paper analyzed the effect of Chinese import competition between 1990 and 2007 on US local labor markets, exploiting cross-market variation in import exposure stemming from initial diffe cerence to US labor markets.
Abstract: We analyze the effect of rising Chinese import competition between 1990 and 2007 on US local labor markets, exploiting cross-market variation in import exposure stemming from initial diffe...

2,818 citations


"The Fall of the Labor Share and the..." refers methods in this paper

  • ...…outcomes in U.S. manufacturing on changes in Chinese imports intensity using OLS models and 2SLS models that apply the Autor, Dorn, and Hanson (2013) approach of instrumenting for import exposure using contemporaneous import growth in the same industries in eight other developed…...

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  • ...To compare these data to the industry data in the census, we convert six-digit HS product codes in Comtrade to 1987 SIC codes using a crosswalk from Autor, Dorn, and Hanson (2013), and we slightly aggregate industries to obtain our time-consistent 1987 SIC-based codes....

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Journal ArticleDOI
TL;DR: In this article, the authors take a critical view of contemporary doctrine in this area and present data which suggest that this doctrine offers a dangerous base upon which to build a public policy toward business.
Abstract: UANTITATIVE work in industrial organization has been directed mainly to the task of searching for monopoly even though a vast number of other interesting topics have been available to the student of economic organization. The motives for this preoccupation with monopoly are numerous, but important among them are the desire to be policy-relevant and the ease with which industrial concentration data can be secured. This paper takes a critical view of contemporary doctrine in this area and presents data which suggest that this doctrine offers a dangerous base upon which to build a public policy toward business.

2,331 citations


"The Fall of the Labor Share and the..." refers background in this paper

  • ...Demsetz (1973), by contrast, posited a “differential efficiency” model closer to the one in Online Appendix A, where increases in competition allocated more output to more productive firms....

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Posted Content
TL;DR: In this article, the authors develop a monopolistically competitive model of trade with firm heterogeneity in terms of productivity differences and endogenous differences in the "toughness" of competition across markets.
Abstract: We develop a monopolistically competitive model of trade with firm heterogeneity—in terms of productivity differences—and endogenous differences in the "toughness" of competition across markets—in terms of the number and average productivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modelling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous mark-ups.

2,259 citations

Posted Content
TL;DR: The authors examined the effect of technological change and other factors on the relative demand for workers with different education levels and on the recent growth of U.S. educational wage differentials and found that the increase in demand shifts for more-skilled workers in the 1970s and 1980s relative to the 1960s is entirely accounted for by an increase in within- industry changes in skill utilization rather than between-industry employment shifts.
Abstract: This paper examines the effect of technological change and other factors on the relative demand for workers with different education levels and on the recent growth of U.S. educational wage differentials. A simple supply-demand framework is used to interpret changes in the relative quantities, wages, and wage bill shares of workers by education in the aggregate U.S. labor market in each decade since 1940 and over the 1990 to 1995 period. The results suggest that the relative demand for college graduates grew more rapidly on average during the past 25 years (1970-95) than during the previous three decades (1940-70). The increased rate of growth of relative demand for college graduates beginning in the 1970s did not lead to an increase in the college/high school wage differential until the 1980s because the growth in the supply of college graduates increased even more sharply in the 1970s before returning to historical levels in the 1980s. The acceleration in demand shifts for more-skilled workers in the 1970s and 1980s relative to the 1960s is entirely accounted for by an increase in within- industry changes in skill utilization rather than between-industry employment shifts. Industries with large increases in the rate of skill upgrading in the 1970s and 1980s versus the 1960s are those with greater growth in employee computer usage, more computer capital per worker, and larger shares of computer investment as a share of total investment. The results suggest that the spread of computer technology may "explain" as much as 30 to 50 percent of the increase in the rate of growth of the relative demand for more-skilled workers since 1970.

1,943 citations