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Declining worker power versus rising monopoly power: Explaining recent macro trends

Anna Stansbury, Lawrence H. Summers 02 June 2020

Since the early 1980s, the US has seen a falling labour share and slow wage growth for typical workers, while measures of corporate valuations and measured markups have increased. ...

Globalisation or technological change have often been posited as causes for the falling labour share (e.g. Elsby et al. 2013, Karabarbounis and Neiman 2014, Abdih and Danninger 2017, Autor et al. 2020). But the decline in the labour share has been much more pronounced in the US than in other industrialised economies which are arguably similarly exposed to globalisation and technological change (Gutiérrez and Piton 2019). And the increases in corporate valuations and markups – as well as rising profit rates, even as the safe interest rate declines – appear to suggest that rents to capital have increased. This makes the recent evolution of the US economy difficult to explain in a perfectly competitive framework (particularly since one might have expected globalisation to have led to increased competition for US firms, and reduced profitability). ...

More recently, therefore, a number of papers have argued that increasing monopoly or monopsony power can explain trends in the labour share, corporate valuations, profitability, and markups (e.g. Barkai 2017, De Loecker et al. 2020, Eggertsson et al. 2019, Farhi and Gourio 2018, Gutiérrez and Philippon 2017, Philippon 2020). But while these factors have no doubt played some role, a different factor provides a more compelling explanation: the broad-based decline in worker power in the US economy.

In our recent paper, we argue that the decline in worker power – as private sector unionisation and union power fell, the real value of the minimum wage declined, shareholder activism increased, and ‘ruthless’ management tactics became widespread – redistributed income from workers to capital owners, leading to a fall in the labour share, rising corporate valuations and measured markups, and a decline in the NAIRU (Stansbury and Summers 2020). We believe this explanation, which we dub the ‘declining worker power hypothesis’, has been substantially under-emphasised in recent macroeconomic debates.