Why do dom­i­nant, prof­itable com­pa­nies share less of their gains with la­bor?

As in­dus­tries con­sol­i­date, they pros­per but shut out em­ploy­ees It’s “one of the tran­scen­dent is­sues con­fronting the U.S.”

Bloomberg Businessweek (Asia) - - CONTENTS - Peter Coy

Big business is get­ting big­ger, and work­ers’ slice of the eco­nomic pie is get­ting smaller. Those trends have bred re­sent­ment to­ward large cor­po­ra­tions. Now re­search shows a sur­pris­ingly tight link between the two phe­nom­ena: The share of the pie that goes to work­ers has been shrink­ing most in pre­cisely those in­dus­tries where own­er­ship is be­com­ing more con­cen­trated.

In­creas­ing in­dus­try con­cen­tra­tion “may ex­plain one of the tran­scen­dent is­sues con­fronting the U.S. econ­omy,” namely la­bor’s de­clin­ing share and prof­its’ ris­ing share of the value a com­pany cre­ates, Michael Feroli, the chief U.S. econ­o­mist at JPMor­gan Chase, wrote in an April 25 re­search note. In an in­ter­view four days later, Feroli said that while the find­ing needs closer anal­y­sis, “I haven’t had any­one say, ‘You’re

ob­vi­ously miss­ing some­thing.’ ”

The work of Feroli and his team im­presses Ja­son Fur­man, chair­man of the pres­i­dent’s Coun­cil of Eco­nomic Ad­vis­ers. “I think it’s great there’s more of a de­bate about con­cen­tra­tion and

its im­pacts on the econ­omy,” he says. Feroli and fel­low econ­o­mists tapped new data that Fur­man’s group gen­er­ated for an “is­sue brief” last month. From 1997 to 2012, the re­port said, the 50 largest com­pa­nies in many sec­tors sharply in­creased their share of in­dus­try rev­enue.

Feroli’s team lined up those num­bers against new data from the Depart­ment of Com­merce’s Eco­nomic Census, which shows the value added by each in­dus­try—i.e., the amount of money the sec­tor re­ceives for its prod­ucts or ser­vices mi­nus the cost of in­puts such as parts, raw ma­te­ri­als, and en­ergy. The value that the sec­tor adds is split among work­ers (wages and salaries), gov­ern­ment (taxes), and “sur­plus,” which in­cludes profit for share­hold­ers. The share work­ers got tended to de­cline in in­dus­tries where there’s more con­sol­i­da­tion.

One vivid ex­am­ple is in trans­porta­tion and ware­hous­ing. The 50 big­gest com­pa­nies in­creased their share of rev­enue by more than 11 per­cent­age points from 1997 to 2012; yet work­ers’ share of the value added by the sec­tor fell 7.6 per­cent­age points from the 1998-99 av­er­age to the 2013-14 av­er­age. The sec­tor in­cludes both rail­roads and air­lines, in­dus­tries where a se­ries of block­buster merg­ers con­cen­trated own­er­ship at the top. Lee Klaskow, who fol­lows rail­roads for Bloomberg In­tel­li­gence, says they have be­come “ex­tremely prof­itable.” Work­ers tend to be well-paid, but there are fewer of them, re­duc­ing la­bor’s share of in­come, he says.

At the other end of the con­cen­tra­tion scale, there was a slight de­cline from 1997 to 2012 in big com­pa­nies’ dom­i­na­tion of the health-care and so­cial as­sis­tance sec­tor. There was a cor­re­spond­ing in­crease in the share of the value added in the in­dus­try go­ing to la­bor, fit­ting the pat­tern Feroli noted.

What ac­counts for the pat­tern? Feroli doubts the the­ory that in­dus­tries with greater con­cen­tra­tion can pay lower wages be­cause fewer com­pa­nies are com­pet­ing for tal­ent. If com­pa­nies in one sec­tor tried to un­der­pay, their work­ers would switch to other sec­tors over time, he says.

A more likely ex­pla­na­tion, Feroli says, is that in­dus­tries with more con­cen­trated own­er­ship can charge higher prices. They pay out their ex­tra prof­its to share­hold­ers, or to the gov­ern­ment in taxes, but not to work­ers. The ques­tion is why the com­pa­nies have felt so lit­tle pres­sure to share the bounty with their work­ers. Econ­o­mists cite the de­cline in unions and em­ploy­ees’ fears, stem­ming from the last re­ces­sion, that they could be re­placed if they com­plain. One hope­ful sign for work­ers: The share of na­tional in­come go­ing to wages and salaries has re­bounded since 2012, eras­ing about 30 per­cent of its post-1997 de­cline.

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