In America, the share of the economic pie going to workers has been on the decline for about three decades, and this has accelerated since the turn of the century. The fall has occurred in most other countries, too. In the U.S., the share of income workers take home each year now hovers around 60%. The leading theories to explain this trend — automation and competition from China — are inadequate. A recent paper puts forward a different story based on the rise of “superstar firms”. More and more industries have become “winner take most” over the last 40 years. The rise of the superstar firm isn’t simply a reflection of a rigged economy where the incumbents are colluding to rip off consumers and workers. But the risk is that the dominance of superstars will eventually contribute to a fall in economic dynamism and productivity that will further entrench their power. Left unattended, this may stoke popular resentment of big business or big government, or both.

Few things are stable in economic life. Sixty years ago, Nicholas Kaldor laid down one seemingly immutable fact: The share of the national income taken by labor was constant. In other words, every year workers took home around two-thirds of the economic pie, and the owners of capital took the rest. The stability of this ratio was, as his fellow Cambridge economist Lord Keynes said, “something of a miracle.”

So much for miracles. In America, labor’s share has been on the decline for about three decades, and it has accelerated since the turn of the century. The fall has also occurred in most other countries. In the U.S. the share of income that workers take home each year now hovers around 60%.

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There’s a lot of debate over the magnitude of the decline, but there is broad consensus that it has happened and that it’s a big deal. The disagreement is over why labor has been losing out.

Maybe the leading story is “Robocalypse Now.” Rapid technological advance in computers and automation has led to a huge fall in the quality-adjusted price of capital equipment. Firms replace expensive people with cheaper machines, and the fraction of added value going to workers falls — or so the story goes.

The problem with this story is that it assumes firms have the flexibility to switch easily between labor and capital. In wonkish terms, the capital-labor elasticity of substitution must be greater than one for this hypothesis to be true, so that a fall in the price of machines spurs employers to spend more on machines relative to workers. The empirical evidence does not suggest that labor and capital are sufficiently substitutable for this to occur.

The other main explanation for labor’s downfall is that Chinese imports have caused employers to outsource employment to Asia, causing a fall in the labor share domestically, even if labor utilization does not fall globally. But the data shows a fall in labor’s share in nontraded sectors like retail and wholesale, not just in traded sectors like manufacturing. Moreover, China itself is experiencing a sharp decline in labor’s share. Thus it’s unlikely that China is the main cause of the decline in the labor share in the West.

In a recent paper, we put forward a different story based on the rise of superstar firms. More and more industries have become “winner take most” over the last 40 years. Firms with a cost or quality advantage have always enjoyed higher market shares. In the “good old days,” more-productive companies would take a bigger slice of the market, but there would be plenty left over for their rivals. By contrast, the new behemoths of our age capture a much larger fraction — if not all — of their market. Think of Google, Apple, and Amazon in the digital sphere, or Walmart and Goldman Sachs in the offline world.

It’s not that superstar firms pay lower wages; in fact, on average, big firms usually pay more. But wages at superstar firms represent a smaller fraction of sales revenue. Superstar companies make lots of profit per employee, so as they become a bigger and bigger part of the economy, the overall share of GDP going to labor goes down.

Several pieces of data support our superstar theory. First, our theory predicts that markets will become increasingly concentrated, and sure enough that’s what the data shows.

A second implication of the theory is that the labor share in the average firm won’t have changed very much. Our data confirms that this is the case. What’s happened is that the mass of the economy has shifted between firms, toward the superstar companies.

Third, the industries that have become more concentrated are the very same sectors where the labor share has fallen the most. These are the industries where the reallocation toward superstar firms has increased the most.

The rise of superstar firms isn’t simply a reflection of a rigged economy where the incumbents are colluding to rip off consumers and workers. The patterns we document are not confined to the U.S.; they are happening all over the world. That suggests that changes in antitrust law or other policy-specific factors can’t be the primary driver.

If policy isn’t driving rising concentration, what is? One possibility is that the near-frictionless commerce enabled by the internet and globalization enables more efficient firms to be rewarded with higher market shares today than in the past. Indeed, we show that the industries where concentration has risen the most are also those where there has been the fastest growth in productivity and innovation.

Does this mean we should be relaxed about the move to an economy dominated by superstar firms?

No, for at least two reasons.

The declining labor share has been coupled with a slowdown of economic growth, which means declining pay and job opportunities for the average worker. In effect, workers are getting a shrinking slice of a barely expanding pie.

And although superstar firms may have become dominant through competitive means, they may cement their position using methods that are less benign. Large, profitable firms invest heavily in lobbying to protect their advantage, skewing the political system. They may pursue business strategies that make it hard for new challengers to grow and flourish. Microsoft became a near-monopolist in operating systems through innovation and good decisions, but then strove to keep entrants like Netscape out of the market. Even when superstars fail to deter competitors, they can often just buy up the new threat, as Facebook has with Instagram and WhatsApp.

The risk is that the dominance of superstars will eventually contribute to a fall in economic dynamism and productivity that will further entrench their power. Left unattended, this may stoke popular resentment of big business or big government, or both. Arguably, this process is already well under way.