It is a fact that the U.S. economy has become more concentrated. As I have written in previous pieces in this series, this has (perhaps) been a bad thing for the U.S. economy, although there are arguments against that. The market power interpretation of American corporate concentration can tell us a lot about three important trends: labor’s share of income in the economy, company dynamism and capital investment.
Labor’s share
Labor’s share of nonfarm business income has fallen steadily since 2000, according to data from the U.S. Bureau of Labor Statistics As the report from Barclays notes, this is consistent with both the market power and winner-takes-all explanations for corporate concentration. In market power, firms are able to charge higher prices, which translates to higher returns to shareholders, meaning that workers get a lower proportion of income. Winner-takes-all explains this phenomenon by pointing out that more efficient firms by definition are those that pay out more to shareholders, and less to employees.
Barclays states that labor’s share of income stood at 56% in 2016, down from 64% in 2000. This ratio had not fallen below 60% since the 1940s. Sectors with higher concentration show the biggest declines in worker income share, suggesting that this is a trend set to continue as the economy becomes more and more concentrated. However, the report acknowledges that there are other factors at play: competition with Chinese manufacturers, declining union power and automation have all also had a depressing effect on labor.
Business dynamism
Measures such as the rate of new business formation, quantity of initial public offerings and employee churn all show that business dynamism is declining in the U.S. This is inconsistent with the winner-takes-all approach to concentration, which states that more efficient firms are more dynamic and have a net stimulative effect on the economy.
In the market power approach, however, powerful companies keep new competitors from forming through the use of predatory pricing, lobbying for preferential legislation and using power in one market to apply pressure to another. An example of the latter is Amazon (AMZN, Financial)'s ability to extract cheaper fares from UPS (UPS, Financial) and FedEx (FDX, Financial), resulting in the service becoming more expensive for other merchants (as the logistics companies need to make up the difference). This makes Amazon’s own delivery services more attractive to third-party merchants.
Barclays found that sectors with the most concentration had the least employee churn, suggesting that there could be an inverse correlation between concentration and dynamism.
Corporate investment
Winner-takes-all posits that concentration should lead to more investment, as firms seek to out-compete one another. In market power, dominant firms have less of an incentive to invest in themselves, as they can hold back competition by other means. Barclays found:
“Our panel regressions also indicate that the decline in investment has been more severe in sectors with higher concentration, in line with results from the academic literature. This is particularly suggestive of the importance of the market power narrative; highly concentrated industries are precisely the ones for which the market power and winner-take-all narratives suggest different things about investment.”
In other words, increased concentration could be contributing to the slowdown in corporate investment and business dynamism, and may also be one of several factors behind labor’s share of income. While Big Tech has for now eluded regulators, it may behoove them to start considering the effect that these leviathans are having on the wider economy.
Disclosure: The author owns no stocks mentioned.
Read more here:Ă‚
The US Economy Is Becoming More Concentrated. Why? Part 2Ă‚
The US Economy Is Becoming More Concentrated. Why? Part 1Ă‚
Morgan Stanley: Disregard Strong Consumer DataÂ
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