The Rise of Superstar Firms and the Fall of the Labor Share (David Autor, MIT)

The “labor share” of GDP has fallen since 2000. Is this another sign that the robots are going to rule our economy? David Autor, an economics professor at MIT, explains the differing explanations for why this is happening.

The “labor share” of GDP means the share going to wages, salaries and benefits—as opposed to going to capital (stockholders, business owners, etc.). That money hasn’t gone away, but it has been concentrated in the hands of fewer and fewer people.

Why is this happening? Is it because of robots taking work from humans? A lack of competition? Or something else? David Autor explains the answers he discovered in his 2019 study on labor share and superstar firms.

This video is based on the paper:
The Fall of the Labor Share and the Rise of Superstar Firms by David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen. https://economics.mit.edu/files/12979

More of David Autor’s work: https://economics.mit.edu/faculty/dauto

Want to see more economists in the wild? Check out our playlist: https://mru.io/1708a

Are you a teacher? Here’s a free curriculum about the future of jobs: https://mru.io/robots-e4827

Want to dive deeper? Check out this video to see how globalization and automation is changing our economy: https://mru.io/avengers-3fa96

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- [David Autor] People see
this phenomenon --

this falling share of income,
rise of these super-competent firms --

as kind of one of the first horsemen
of the Apocalypse,

the sign that we are entering
an era where labor relevance

to the production side of the economy
will become smaller and smaller

and eventually asymptote to zero.

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Labor's share of national income
has been falling, pretty steeply,

since around 2000.

It means that labor is getting
a smaller share of the pie,

and the pie isn't growing
very rapidly at present.

And that is a potential problem

because it's not that that money
then goes away --

it goes to owners of capital --

but ownership of capital investment
is far, far more concentrated

than ownership of labor.

We'd like to know why it's happening
and how far it's going to go.

So there are three prominent theories
about why labor's share is falling.

One theory is that you just have a lot
of technology substituting for labor.

So, everywhere you look,
machines are doing things

that people used to do.

In fact, that would be
the kind of simple

capital labor substitution story.

A second story would have to do
with failure of competition,

that firms are getting
market power --

meaning they don't have
very robust competition.

That allows them to raise prices,

and the profits may not
be paid to workers

but they'll be paid to owners.

A third story is that the nature
of competition is changing

in a way that is favoring
more productive firms.

There is this idea out there --
superstar firms,

these firms that are
highly productive, highly capable,

that's causing the economic activity
to reallocate from smaller,

less productive firms
to larger, more productive firms,

many of which historically
are more capital intensive

and have lower labor share.

Some superstar firms in the US? --
Well, maybe you would say Amazon,

Walmart, Apple.

If you think about
the rise of Walmart --

Walmart was a platform competitor.

It didn't just have nice stores --
In fact they're not that nice --

What it had was supply chains
that ran all the way into China.

It had the world's most sophisticated
distribution system.

It had incredible
inventory tracking.

You could argue that Walmart
had no close competitors

until Amazon arose.

And notice Amazon
didn't imitate Walmart's platform,

it created another platform
to compete with it.

So, many of these superstar firms --
they have some platform

that allows them
to ward off competition

and produce differently,
in a specialized way.

So those are three classes
of explanations, so just to be clear:

One, technology everywhere.

Two, failure of competition.

And then third is
this superstar form of competition

which is not, per se, a failure.

In fact, it could even reflect
better competition of sorts.

So, which one is true?

I don't think the evidence
for that is as strong.

Definitely we see examples
of firms adopting technologies

and reducing labor input.

We see that in manufacturing.
We see that with robotics.

It's a real phenomenon.

It's not clear that's happening
everywhere else.

Automation is having big effects
on labor, let me be clear,

but they may not be in terms
of reducing labor's share

of national income.

It may be affecting the type
of jobs that are being offered.

It's absolutely the case that
we also have failures of competition.

Not, per se, in Walmart --
I think that's fine --

but US airlines,
US mobile phone carriers,

US cable operators --

bad antitrust policy
allowing market concentration

that causes those firms
to charge prices

that are too high
in excess of costs,

and that will typically
cause labor share to fall.

If regulatory failure is the cause
of labor's falling share,

you would expect that to vary
across countries a great deal,

because countries have
different regulatory bodies.

The fact that this has occurred
so pervasively

makes many people suspect
it can't just be regulation.

The third hypothesis,
the superstar hypothesis,

there's also evidence for,

and we know that the rise
of some of these superstar firms

has coincided with a fall
in labor's share of national income.

And what we see is
a reallocation of economic activity

from smaller firms
with larger labor shares

to larger, more productive firms
that have lower labor share.

And what's interesting is

we don't see a reallocation
of employment.

It's not that all the workers
are going to work for the big firms,

it's that those big firms
are able to supply more customers.

They call it "scale without mass" --

firms that have tons of market share,

tons of revenue,
and very few employees.

So I think all three hypotheses
are worth your entertaining,

and if anyone tells you
only one is correct,

they're kind of
overstating their case.

The assumption is hey,
you're born with some capacities,

with some basic physical skills,
cognitive skills.

You invest in those capacities
through school.

You build human capital.
You build expertise.

And then you leave school
and you sell that capacity,

that expertise, to the market
for 30, 35 years,

and then you retire.

If we entered a period

where labor's share
of national income was very low --

meaning labor
was no longer scarce --

we would still have lots of wealth.

But we wouldn't have
a very good means of distributing it.

We wouldn't know
who had what claims on it.

And that's not
a very attractive vision

of a market economy.

I'm optimistic that the future of work
will involve lots of work,

that we will not
be running out of jobs.

We have -- despite 200 years
of incredibly rapid automation

we have not
made ourselves irrelevant.

We've just changed
the type of work we do.

I have enormous faith
in human creativity.

We always find
more interesting things to do

with our time,
and the tools that we create

create possibilities
that we don't foresee.

So there will be a world
of interesting work to do.

The challenge we face
is making sure

people have the skills
and qualifications

to be able to do that good work.

- [Narrator] Want to see more
Economists in the Wild?

Check out our playlist.

Are you a teacher?

Here's a free curriculum
about the future of jobs.

Want to dive deeper?

Check out this video
to see how globalization

and automation
is changing our economy.

♪ [music] ♪