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Companies and inequalities | Inequality: The IFS Deaton Review

There have been dramatic changes in the business landscape of American companies over the past four decades, which have been widely documented by scholars and are the subject of much public debate (e.g., Van Reenen, 2018; Akcigit and Ates , 2019).

In broad terms, many of these trends could be summed up by saying that corporate inequality has increased – companies are increasingly different in terms of productivity, wages, profit margins and size. These changes have been accompanied by several worrying trends such as declining productivity growth, stagnating real wages (especially for low-skilled workers), rising profit margins, a declining labor share in the GDP and a decline in business dynamism (e.g. the share of workers in start-ups has declined).

Abstract

  • There is great inequality between companies. In the UK, just 0.1% of businesses have at least 250 workers, but in 2019 these businesses accounted for nearly two in five jobs and just under half of overall turnover.
  • Over the past few decades, dramatic changes have been documented in the business landscape in the United States. These include the increase in productivity inequalities between firms, higher aggregate markups (of price over variable costs), increasing dominance of large firms, a declining labor share of GDP, and declining firm dynamism.
  • Many of the same empirical trends observed in the United States have occurred in Britain since (at least) the mid-1990s. There has been an increase in firm-level inequality (especially in the upper tails) of productivity, wages, markups and labor shares.
  • The UK has experienced weak productivity growth since the global financial crisis of 2008-2009. This weighed on median and average real wages, which had barely recovered to pre-crisis levels at the onset of the COVID-19 pandemic.
  • Overall mark-ups have been rising since at least the mid-1990s. Labor’s share of GDP has fallen since the early 1980salthough this decline is less dramatic than that of the United States.
  • The similarity of trends in the UK and the US suggests that common trends in technology or globalization have driven these changes, rather than country-specific institutions or policies.
  • Inequality between companies is less of a concern than inequality between people. However, it can signal economic problems, such as a slowing of the diffusion of ideas between leading companies and laggards, and can promote greater wage inequality.
  • We suggest policy options in response to these trends include the modernization of competition rules to cope with the growth of “superstar” companies and the strengthening of the bargaining power of workers.

Download the appendices here.

Quote this as follows:

De Loecker, J., Obermeier, T. and Van Reenen, J. (2022), “Firms and inequalities”, IFS Deaton Review of Inequalities, https://ifs.org.uk/inequality/firms-and-inequality


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