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Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

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Page 1: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Deaton Inequality Review: Firms and Inequality

John Van Reenen, CEP,LSE and MIT

AEA San Diego 2010

Page 2: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Why look at firms at all in an Inequality Review?

• Much evidence that firms matter a lot for worker outcomes such as wages (Van Reneen, ‘96; Abowd et al ’99; Card et al, ‘13; Kline et al, ‘19)

• Big changes in business landscape have accompanied large increase in US inequality over past 40 years & stagnation of real median wages.

─ Are these connected?

─ If so, in what ways?

─ And how should policy respond?

Page 3: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

What’s been happening to firms in last 40 years in US?

• Essentially, inequality between firms has increased dramatically on a number of dimensions

─ Firm Size

─ Industrial concentration

─ Productivity

─ Average firm wages

• Decrease in labor share

• Increase in markups of price over marginal costs

Page 4: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Firms getting bigger since mid ’80s: % JOBS in firms with over 5,000 workers (up from 28% in 1987 to 34% in 2016)

Source: BDS https://www.census.gov/programs-surveys/bds/data/data-tables/2016-firm-and-estab-release-tables.html

Latest:34%

Page 5: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

The Rise of Mega Firms

Source: Autor, Dorn, Katz, Patterson & Van Reenen (2017), Compustat

Global Sales of Top500 US Firms tripled from $4 trillion in 1972 to $12 trillion in 2015

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Top3 in 1985

Top3 in 2015

Page 6: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Rising Concentration in SIC4 within all sectors

6065

7075

Top

20 C

once

ntra

tion

3436

3840

4244

Top

4 C

once

ntra

tion

1980 1990 2000 2010year

CR4 with Sales CR4 with EmploymentCR20 with Sales CR20 with Employment

4−digit Industries in ManufacturingAverage Concentration

Manufacturing Retail Trade

2530

3540

45To

p 20

Con

cent

ratio

n

1015

2025

30To

p 4

Con

cent

ratio

n

1980 1990 2000 2010year

CR4 with Sales CR4 with EmploymentCR20 with Sales CR20 with Employment

4−digit Industries in Retail TradeAverage Concentration

2030

4050

60To

p 20

Con

cent

ratio

n

1015

2025

30To

p 4

Conc

entra

tion

1980 1990 2000 2010year

CR4 with Sales CR4 with EmploymentCR20 with Sales CR20 with Employment

4−digit Industries in Wholesale TradeAverage Concentration

Wholesale Trade

1820

2224

2628

Top

20 C

once

ntra

tion

810

1214

16To

p 4

Con

cent

ratio

n

1980 1990 2000 2010year

CR4 with Sales CR4 with EmploymentCR20 with Sales CR20 with Employment

4−digit Industries in ServicesAverage Concentration

Services

5658

6062

64To

p 20

Con

cent

ratio

n

2530

3540

Top

4 C

once

ntra

tion

1990 1995 2000 2005 2010year

CR4 with Sales CR4 with EmploymentCR20 with Sales CR20 with Employment

4−digit Industries in Utilities and TransportationAverage Concentration

Utilities + Transportation

4550

5560

Top

20 C

once

ntra

tion

2025

3035

Top

4 Co

ncen

tratio

n

1990 1995 2000 2005 2010year

CR4 with Sales CR4 with EmploymentCR20 with Sales CR20 with Employment

4−digit Industries in FinanceAverage Concentration

Finance

Notes: Economic Census. Weighted av. of concentration across the SIC-4’s within each sector. 676 SIC4 industries. Source: Autor, Dorn, Katz, Patterson & Van Reenen (forthcoming QJE)

Page 7: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Rising US productivity dispersion (manufacturing)

Source: Decker, Haltiwanger, Jarmin & Miranda (2018, Figure A6)Notes: Standard Deviation of log(real sales/employment) normalized in a NAICS 6 digit industry-year. HP filtered series in dashed lines. LBD is population whereas ASM is corrected for sample selection. Weights are employment weights.

Page 8: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Source: Song et al (2019), SSA data

Change in individual US earnings inequality is a between firm (rather than within firm) phenomena, 1981-2013

Except for “CEO”, Noincrease in inequalitywithin firms

Page 9: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

US Labor Share of GDP

Source: BLS https://www.bls.gov/opub/mlr/2017/article/estimating-the-us-labor-share.htm

Page 10: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Rising aggregate markups among US publicly listed corporations

Source: de Loecker, Eeckhout and Unger (forthcoming, QJE)

Page 11: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Aggregate Markup rises, driven by reallocation. Median firm markup stable

Notes: Autor, Dorn, Katz, Patterson & Van Reenen (forthcoming, QJE). Manufacturing Census;Panel A: Antras et al (2017) method; B-D use production function, de Loecker and Warzynski (2012).

Aggregate markup(weighted average)

Aggregate markup(weighted average)

Aggregate markup(weighted average)

Aggregate markup(weighted average)

Page 12: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

What are the possible links between business trends & household inequality?

1. Rise in superstar firms helps explain fall of share of labor in GDP (Autor et al, QJE, forthcoming)

─ Large firms have lower labor share of value added (more productive, higher mark ups)

─ As concentration rises, weight of economy shifts to these firms, reducing aggregate labor share

─ Falling labor share a force for household inequality as capital income more unequally distributed than labor income

2. If product market competition lower, this is likely to reduce productivity and pay growth. But has competition really fallen?3. Even if no change in competition, there may still a concern with firm size per se (e.g. political economy)4. Monopsony over labor & other suppliers?5. Complex relationship between firm and individual inequality.

Page 13: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Potential Explanations for business trends

1. Weaker US anti-trust. Philippon ‘19 on falling competition

2. Google/Apple Story. Increased importance of platform competition (network effects, especially in digital markets)

3. Wal-Mart Story. Higher Fixed costs – e.g. Larger firms better at exploiting intangible capital; like proprietary software – Eberly & Crouzet ‘18

4. Increasing competition – Globalization, Internet-based price comparisons; lower communication costs,

• Key Policy Point: Even if firms have become dominant through competing on the merits, doesn’t mean they will continue to do so

─ Anti-trust rules do need modernization (work with Tirole)

Page 14: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Are these trends US specific or more general?

• Active area of research, but my take is that best evidence suggests that the trends are pretty global

• Implies that changes in US-specific institutions such as weak enforcement of anti-trust unlikely to be the main explanation of these business trends

─ Although certainly true in some industries (e.g. healthcare)

Page 15: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Jones (2015) US=1

Like US, Sales Concentration seems to have has also increased in the EU

Source: OECD Multiprod, https://www.oecd.org/sti/ind/multiprod.htm; Criscuolo (2018)Notes: Year effects from regressions with country-industry dummies and year dummies (BEL, DEU, DNK, FIN, FRA, HUN,NOR, PRT, SWE)

Page 16: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Labor Share falling (and markups rising) in many Countries

Karabarbounis and Neiman, 2014

.55

.6.6

5.7

Labo

r S

hare

1975 1985 1995 2005 2015

United States

.55

.6.6

5.7

Labo

r S

hare

1975 1985 1995 2005 2015

Japan

.35

.4.4

5.5

Labo

r S

hare

1975 1985 1995 2005 2015

China

.55

.6.6

5.7

Labo

r S

hare

1975 1985 1995 2005 2015

Germany

FIGURE II

Declining Labor Share for the Largest Countries

The figure shows the labor share and its linear trend for the four largest economies in the world from 1975.

GL

OB

AL

DE

CL

INE

OF

TH

EL

AB

OR

SH

AR

E71

Page 17: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Rising Firm Markups (Price/marginal cost) around the world

Source: de Loecker and Eeckhout (2018), Worldscope; Publicly listed firms

Page 18: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Conclusions

• Dramatic changes in business landscape in the US and other developed countries

─ Increasing inequality in size (concentration up), productivity and wages

─ Aggregate markups also appear to be rising

• Multiple possible links to evolution of firm inequality to disparities between people

• Explanation for trends still unclear. ─ A general story or more industry specific?

• Policy response must be built on this analysis.

Page 19: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Back Up

Page 20: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Payroll share of Value Added (NIPA)

Page 21: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Source: Diez, Leigh and Tambunlerctcchai (2019), IMF; Publicly listed firms

Rising Firm Markups (Price/marginal cost) around the world

Page 22: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Bigger firms have higher TFP

Page 23: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010

Big Firms have higher markups

Page 24: Deaton Inequality Review: Firms and Inequality · Deaton Inequality Review: Firms and Inequality John Van Reenen, CEP,LSE and MIT AEA San Diego 2010